Retail investors tethered by small brokers

Adding salt to retail investors’ wounds were their brokers’ inability to help them take fresh buying positions in a market that seemed...

Adding salt to retail investors’ wounds were their brokers’ inability to help them take fresh buying positions in a market that seemed to have opened up opportunity. Many brokers asked their clients to bring money along in order to take fresh position.

“Almost 80 per cent of small brokers were not accepting the demand for buying from investors even on account of giving cheques,” said a senior executive from a leading brokerage house. Prior to yesterday’s fall, the same brokers used to take positions for their clients with the money following the next day.

“Relatively smaller brokerage houses do not have the financial power to meet these high margin requirements at one go and so the demand for buying was not being accepted by them,” said D D Sharma, vice president (retail equity), Anand Rathi, a brokerage. By comparison, large brokerages are better placed to execute orders in such trying situations.

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“We stopped margin buying for clients who did not bring demand deposits or deposited money online,” said a senior official from Geojit Financial Services. “We did not accept demand on account of cheque as it takes two to three days for cheque clearance.”

The problem arose because of aggregation of margin calls to brokers. The broker is required to deposit the margin with a stock exchange, failing which, his positions are squared off by the exchange. In such a situation, the brokers can’t take fresh positions.

This came as a surprise to numerous investors. “This is a problem with many undercapitalised brokers as they are facing the pressure of meeting margin calls,” said R Venkataraman, co-promoter and executive director, India Infoline. “They had taken unlimited leveraged position which has put them under pressure.”

“We as an institution are very careful while taking leveraged positions,” said Vikas Khemani, head (institutional equities), Edelweiss. “By yesterday, we had cleared all our open positions and are comfortably placed now. Brokers who have taken high leverage positions are under pressure.”

Margin call

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The margin call problem on the futures and options (F&O) positions – one of the main reasons for the current market fall – is coming under control. The 1,408-point fall in the Sensex on Monday saw open interest positions in F&O come down by 15 per cent, from Rs 1,31,000 crore to Rs 1,11,000 crore. Today’s 875 point correction led to a further decline in open interest positions which fell 18 per cent to Rs 91,000 by the end of the day.

The revival, after an intra-day fall of over 2,200 points, was due to the renewed buying into the market as investors tried to capitalise on opportunities. “I don’t see more liquidation happening on account of margin calls,” said Vikas Khemani of Edelweiss.