What’s Happening Inside Indian Dealing Rooms During The Lockdown

While stock markets remain open during the three-week lockdown to contain the new coronavirus, only a few traders are actually working from dealing rooms. Still, restrictions on going to work didn’t hurt volumes as much as the regulator’s new rules to curb volatility.

Bulk of buying and selling of shares during this highly volatile phase for equity markets has shifted to home. Almost 90 percent of dealers of are logging in remotely, and in some cases only one person is there in the trading room, according to BloombergQuint’s conversations with traders from Mumbai and Ahmedabad who spoke on the condition of anonymity out of employment concerns. In an unprecedented move, dealers have been given the permission to log in to their trading terminals from alternative locations.

Since stock markets are electronic platforms, executing trades is not a problem. The bigger challenge was compliance with regulatory norms. The Securities and Exchange Board of India, however, has eased rules, providing relief. Traders working from outside the dealing rooms are exempted from penalties for not maintaining call recording of client orders for buying and selling, which otherwise is mandatory. The regulator also deferred submission of reports till April 30.

Still, dealers catering to institutional clients go to work on rotation as such investors place largely “high touch” orders, broking parlance for orders placed on the phone.

Here’s what’s happening at dealing rooms during the lockdown:

Volumes Fell, But Not Because Of Work From Home

Majority of the retail trades happen online and staff for institutional trades is working on rotation with at least 30-40 percent capacity in certain brokerages, traders told BloombergQuint. But volumes did fall in the last two weeks after SEBI capped leveraged positions in derivatives markets by increasing margins to curb volatility.

The market regulator lowered the limit of positions that can be taken in the futures and options market, increased margin requirements and capped derivatives exposure.

Higher margins, along with cautious brokers enforcing strict trading limits to avoid any client default, impacted volumes, traders told BloombergQuint. The volumes fell by a fourth in the cash market and by more than a third in case of derivatives.

Proprietary trades in the derivative markets took a bigger hit as brokers find it tough to come up with higher margins in a volatile market.

Trading by foreign institutional investors also fell 28 percent after the SEBI rules to counter short selling, NSE data show. According to some of the traders BloombergQuint spoke with, Indian markets are moving in tandem with global peers and SEBI’s measures have only made markets shallow and choppy.

No Defaults, At Least So Far

No brokerage or client default has been reported so far, perhaps because brokers have been cautious and capped trades by their clients. Even exchanges have seen settlements take place on time.

But a few brokers told BloombergQuint that if the current level of volatility continues, defaults can’t be ruled out in the future because of erosion in the value of collateral and requirement of higher margins.

Brokerages Didn’t Require Special Measures

Brokers said they didn’t have to take any special measures to ensure settlement by clients; trades were executed smoothly and margins were collected on time. There was an odd hiccup the day the markets hit the lower circuit for the first time but nothing serious, brokers told BloombergQuint.

Debate On Whether Markets Should Be Open

Some traders questioned why stock markets are open during the lockdown, and cited operational hazards of working from home, compliance issues and risks related to employees who still have to report to work for critical functions.

Others, however, said the market should remain open as shutting down exchanges will go against the basic principle of fair price discovery and liquidity. There’s also a fear of a huge slide when the market open after a shutdown, causing defaults as brokers and exchanges would find it difficult to collect margins in a short span. Some of them also cited the regular functioning of the SGX Nifty to keep Indian markets open; otherwise, they said, Indians who don’t trade on the SGX would be at a big disadvantage.

Short Selling Ban Not Feasible In India

China, Japan, Italy, Spain, and South Korea didn’t shut markets but banned short selling to curb steep falls. But India is different in this respect, according to some dealers, as short positions can only be taken in the derivatives market, unlike some other places where the securities lending and borrowing mechanism is prevalent. A complete ban on short selling in India, they said, would mean shutting the derivatives market, for which there is no precedent.