Peak margin norms to hit market depth without impacting on trading volumes

Most new customers are investors who mostly buy and hold; they aren't adding liquidity to markets the way day traders do, says top market player

The transition to the fourth and final phase of peak margin requirements from Wednesday is unlikely to bring down trading volumes significantly but may impact market depth, adding to the impact cost.  

"While the markets have grown phenomenally in terms of participation thanks to the bull market, the market depth or the total quantity of bids and asks in any stock has only deteriorated over the last year. Most new customers are investors who mostly buy and hold. They aren’t adding liquidity to the markets the way day traders do," said Nithin Kamath, founder & CEO, Zerodha, adding that this will result in higher impact cost which will hurt all types of market participants.

"Some BTST trades may get impacted due to additional margin requirements but by and large the market is expected to take the transition in its stride with minimal disruption," said Alok Churiwala, MD & CEO of Churiwala Securities.

BTST stands for buy-today-sell-tomorrow.

The move to phase-4 will help reduce risk and leverage in the system and help bring in more traders in the long run. Experts said that client default risk which can cause a brokerage firm to go down is the lowest it has ever been historically.

"The overall leverage will come down in the system and every trade will have to backed by money or collateral. "Most large investors that have their accounts with traditional brokers have worked around the problem by pledging their shares. Those with discount brokerages anyways are not given any leverage at present," Churiwala said.

Experts believe that there has been an inadvertent second-order effect because of the new peak margin norms. "Intraday traders who seek leverage and who don’t have sufficient margins have moved from trading stocks, futures, and shorting options, to buying options that have much higher leverage and risk. The total number of option trades daily as a percentage of overall trades on the exchange is now at all-time highs," said Kamath.

Brokerages have also faced a few issues in implementing the new norms. A few days back, the Association of National Exchanges Members of India (Anmi), an industry body for brokers, had written to the Securities and Exchange Board of India (Sebi) saying that the new norms were resulting in unwarranted penalties on trading members, who are being mandated to collect money upfront even before clients undertake trades.

According to Anmi, members should be allowed to pass on the peak margin penalty to the client when the margins levied for the position increases.

The industry body favoured a model that may predict the peak margins to be complied with by the trading member so that on any given day upfront compliance may be considered based on the margins for T-1 day. Further, it wanted a T+1 day timeline to be considered for compliance, based on the details of the T day peak and/or end of day margins.

The peak margin norms are being implemented in phases starting December 2020. Between December 2020 and February 2021, traders were supposed to maintain at least 25 per cent of the peak margin. This margin was raised to 50 per cent between March and May. The same has been increased to 75 per until August. And finally to 100 per cent September 1 onwards.

From September 1, brokerage firms can’t give any additional intraday leverages for both equity and derivatives trading. This means you will need minimum margins --- VAR+ELM for stocks and SPAN+Exposure for derivatives, even if you are trading for intraday.

SPAN is standard portfolio analysis of risk, VAR is value at risk, and ELM is extreme risk margin — metrics used to determine the risk to investment for a particular security.