Pre COVID-19, the market was working great for the brokers all around India. At the beginning of this year, the market capitalization on major exchanges in India i.e. The National Stock Exchange and The Bombay Stock Exchange was about $2.16 trillion. Both NSE & BSE were traded at their highest level ever, hitting peaks of 12,632 and 42,273 respectively. The market condition was quite favorable for brokers of all levels of India. In fact, there were 30 companies that were expected to file IPO’s.
However, as the COVID-19 Strike, the stock market in India and around the world has crashed at a level that was not witnessed after the Global Financial Crisis of 2008. The Nifty 50 and BSE Sensex have suddenly fallen by 38%. The pandemic has not only affected the investors and traders but brokers as well. Due to the continuous crash of the stock market, now it becomes challenging for many domestic small brokers to survive in the market.
COVID-19 strike is not only the one major worry for many domestic brokers these days. SEBI New regulations for margin trading have also impacted domestic brokers to a great level. Do you know how? Continue reading this blog to know
- What SEBI’s new guideline is?
- How is it going to impact the market?
- How is it going to impact domestic brokerage businesses?
- What are new business opportunities for brokers to get profitable returns?
SEBI NEW GUIDELINE EXPLAINED
The market regulator, The Securities and Exchange Board of India (SEBI) has introduced its new guidelines related to margin trading to make the market safer for investors and traders. The new regulation is implemented to enable verification of upfront collection of margin from clients in the cash segment. In simple words, now traders and investors have asked to pay or maintain their full margin upfront for trades in the cash market. They have to put the margin down even before they sell a stock.
Though this regulation is implemented to make the market safer for the investors or traders, many brokerage firms have not liked this regulation too much as it will put an end to the intraday trading ( which is responsible for nearly 90% of the daily turnover of the stock market) and turnover generated out of it.
As a result of the introduction of the upfront collection of margin from clients and its verification, the cash segment in the Indian stock market is going to be affected in two major areas:
In India, a large number of brokerage firms, especially the traditional brokers follow the T+2 day system of billing & collection. In this, the brokers are required to keep the margin upfront with the exchange while keeping the collection from the clients as per the discretion of the broker.
This means that, without having to put a single rupee as a margin, a trader or investor can enter into a trade in the cash segment of any amount allowed by the broker and pay back the taken leverage to the broker till T+2 days. This way of doing trading is going to stop from August 1, 2020. As per the SEBI Circular titled ‘Collection and reporting of margins by Trading Member (TM) / Clearing Member (CM) in Cash Segment’ dated November 19, 2019, from August 1, 2020, traders or investors have to keep the exchange prescribed margin with the broker in order to enter into the trade. If it is not so, a margin penalty will be charged by the exchange to the client.
The above-mentioned circular has no effect on intraday trading as the exchange has always been monitoring the margin collected by the broker on the net position at the end of the day. This system was not adequate to make sure that the broker has collected the margin from the traders for intraday trades.
For instance: If anyone buys 1000 HDFC shares and sells it during the same day, no margin is required to be paid as per the calculation at the end of the end. This is how brokers are able to offer extra leverage to their clients for intraday trades.
With the introduction of the framework for verification of upfront collection of margins from clients, the Clearing Corporations will be asked to provide the peak margin during the day to the brokers which is required to be collected upfront from the traders/investors. Moreover, the practice of imposing margins only on the net position at the end of the day will be stopped.
However, as this circulation is going to be implemented in a phased manner by SEBI, its impact on intraday trades will be noticed from December 2020. And by these two major changes, brokers will either not be able to provide extra leverage or reduce the rate of leverage for both delivery and intraday trades.
HOW IT IS GOING TO IMPACT THE MARKET?
This new regulation will surely impact the market turnover both in the cash & derivative markets.
Not all traders always have a sufficient amount of money in their account for trading. If the traders will not get the cash or leverage upfront, they could not be able to perform trade that could lead to a significant reduction of volumes in the intraday and delivery market where approx Rs.30,000 crore of trades occurs on an average rate on national stock exchanges like NSE and BSE.
Some of the brokerage firms and market experts have also predicted that with this new regulation of VaR+ELM, the daily turnover in both the cash and derivative market will shrink almost 20 to 30%. The clients have to maintain higher margins in the account which can result in lower trading volume. The lower trading volume equates to lower income for the industry.
HOW IT IS GOING TO IMPACT THE DOMESTIC BROKERAGE BUSINESS?
As more than 50% of brokerage profit comes from the cash segment, the introduction of the upfront collection of margin is surely going to hit the topline of the brokerage industry. However, this impact will be felt more by traditional brokers. Such firms used to charge brokerage on a percentage of turnovers of the client which is definitely very higher than discount brokers who charge per order or usually have a fixed upper cap.
Till date, the traditional brokers have been able to charge higher brokerage because of the option they offer to their clients to pay the investment amount even after two days without any interest. They use the T+2 day a payment system as an additional trading feature and charges a good amount of brokerage in lieu of interest.
Traditional brokers will also be impacted by these new regulations because they charge brokerage to the customers depending on the percentage of turnover and as the rate of turnover is going to decrease their income will surely affect a lot.
It is not only a challenging situation for only traditional brokers but small brokerage firms as well. Due to the squeezing margin and low return, many will run out of business.
WHAT ARE NEW BUSINESS OPPORTUNITIES FOR BROKERS TO GETTING PROFITABLE RETURNS?
The introduction of SEBI’s new guideline is not an end. There are many opportunities in the market that stockbrokers can grab to earn higher revenue. Instead of waiting for this situation to come, many smart brokerage firms have moved towards the cryptocurrency market and have achieved tangible returns by starting their own brokerage business in the crypto market.
Unlike the stock market, there are no limitations on margins or leverages in the cryptocurrency market. Brokers can offer as much leverage they want to offer their clients in lieu of higher returns. Moreover, the challenges to survive in the cryptocurrency market are comparatively lower than the stock market, especially in today’s tough economic scenario.
Even in this pandemic situation, where the stock market has seen a massive fall the cryptocurrency market has performed really well all not only in India but around the world. Countries like China, India, Russia, France, USA are observing a higher number of investors to choose assets than before and many believe that it is going to stay in the financial market.
So, if your brokerage business is also going to be affected by SEBI’s new margin guidelines, it will be good to start your own crypto brokerage business to stay ahead. As this is a completely new market, the competition is also lower than in the stock market.
Today PCEX, an Estonia based cryptocurrency exchange is the only exchange in the world that runs on the B2B model and offers trading membership to businesses all around the world for starting their own successful brokerage business in the futuristic financial market. PCEX Member being its first Indian broker is doing great and has completely remained untouched from SEBI’s new margin guidelines.
After the announcement of SEBI’s new guidelines, a lot of domestic brokers have approached PCEX for getting a trading membership to run their brokerage businesses without impacting their trading volume and margins. It’s time for you too to switch to PCEX for starting your own successful brokerage business in the futuristic financial market.