A Change In Trading Norms That Has Left Brokerages Worried
Brokerages expressed concerns about the new norm that bars using the proceeds of stocks sold for two days to buy fresh shares, saying it will impact volumes and hurt small investors the most.
NSE and BSE published FAQs on margin collection and reporting on July 26. These follow the new margin requirements that the regulator mandated earlier this year to curb speculative trading when the market tumbled the most in more than a decade.
Among other things, the two exchanges, in a similarly worded FAQs, said that from Aug. 1:
- Investors won’t be able to use proceeds from selling stock holdings to buy other stocks on the same day.
- Investors will have to wait for two days from selling stocks to use proceeds to buy new shares.
- Cash market transactions will attract margins.
- Penalty for non-collection of upfront margin now on the broker, not on the client
- Exchanges may require margin for a sell trade.
Stock exchanges have yet to respond to BloombergQuint’s emailed queries.
Small investors in the cash market will have to comply with the same upfront margins for small investments, Ajay Menon, managing director and chief executive officer, broking and distribution, Motilal Oswal Financial Services, said in an interview with BloombergQuint. “When a person sells a stock, he/she is supposed to hold the shares or else there is a margin on that transaction. This will impact overall volumes in the settlement market. Small investors will be impacted the most.”
Menon said brokerages will comply with guidelines but need more time for implementation.
Nithin Kamath, founder & chief executive of Zerodha, said in the website’s blog, “While we can live with most points on the FAQs given out by the exchanges, there’s one big issue that will set the industry back by a couple of decades where you cannot use the proceeds from selling your stock holdings to buy other stocks for two days from when you sell them.” The broking community is trying to make representations and get the exchanges to reconsider this as it will potentially change the way trading is done, he said.
Shares of brokerages including Motilal Oswal, IIFL Securities Ltd., 5paisa Capital Ltd. and ICICI Securities Ltd. fell 5-9% on Monday.
Watch the full conversation with Ajay Menon here: