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New SEBI rule to hit intraday trading in India

by Jonathan Adams
intraday trading

This measure will be rolled out effective from December 1, 2020 which will involve a phased adoption over 3 phases of 3 months each and full adoption by September 1, 2021

In what could mark the end of intraday trading, which accounts for 90 per cent turnover in the stock markets, markets regulator SEBI (Securities and Exchange Board of India) has put out a circular on upfront collection of margins from clients in the cash and derivatives segment.

According to brokerage estimates, intraday margins will go. This could result in huge reduction in intraday turnover which is almost 90 per cent of all turnovers. This is because an excess intraday margin provided could result in margin penalty.

SEBI has introduced the concept of peak margin reporting. The clearing corporations shall send four snapshots during the day for identifying the margin requirements for clients across the day.

Margin penalty to be based on a higher peak margin reported during the day based on snapshot files or end of day margin as per current practice.

This practically means, no more intraday leverage, said Jimeet Modi, Founder and CEO, Samco Group.

This measure will be rolled out effective from December 1, 2020. There will be a phased adoption over 3 phases of 3 months each and full adoption by September 1, 2021.

Nitin Kamath of Zerodha tweeted: Today’s SEBI circular says that all brokerage firms have to stop intraday leverage products by August 2021 in a phased manner.

Modi of Samco Group said: This was expected since last year after the December 2019 circular. Now the industry and exchanges will need to adjust to this new reality. This probably will also accelerate the market share towards discount brokers from full service brokers. Differentiated margins was a service offering by full service brokers which has now been arbitraged away.

Our estimate is that almost 30-35 per cent of the intraday turnover is based on additional leverage provided by brokers. Now assuming full margin is required, total turnover would shrink by approx. 20 per cent since balance part margin was still being collected from clients, he said.

Clients will need to maintain a lot more margins for initiating intraday trades. Return on investment on intraday trading will fall substantially.

In the period of phased adoption, brokers shall make sure that the funded component is out of their funds and not clients funds. This is going to be difficult for most brokers, Modi said.

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