Mumbai, Dec. 19: The tightly knit community of stockbrokers is being diced into four categories for the first time with varying capital deposit requirements for each.
The Securities and Exchange Board of India (Sebi) has carved up the broking community based on the way they transact business on the market (proprietary, client trades or both) and whether or not they juice arbitrage opportunities through super-fast algorithm trading.
In doing so, the market regulator tightened the base minimum capital (BMC) requirement of brokers from the earlier levels of Rs 4-10 lakh that were based solely on the stock exchanges where they operated.
The BMC deposit has been prescribed for stock brokers because of the various risks that they may bring to the system.
Explaining the rationale for revising the minimum capital that brokers must have, Sebi said over the years the market structure had undergone significant structural changes. “Various technological changes and the increased speeds of trading have brought to the fore the greater quantum of risks arising during the course of transactions,” it said.
The enhanced BMC requirements will be implemented by March.
While the base minimum capital deposit has been set at Rs 10 lakh for those who carry out proprietary trades without algo trading, at the top is the category of brokers who resort to algorithmic trading for whom the minimum deposit has been set at Rs 50 lakh.
On the other hand, brokers who only trade on behalf of clients (no proprietary trading) and without algo, the minimum capital deposit has been set at Rs 15 lakh. In the case of those brokers who do both proprietary trading and trading on behalf of clients without algo, the BMC is fixed at Rs 25 lakh.
Thus, a key highlight of the revised minimum capital limit is the steep requirement for those brokers indulging in algo trading.
Algo trading is a sophisticated system which uses mathematical models for making transaction decisions in stock, commodities and forex markets. Institutional investors opt for algo trading because of the large amount of shares they purchase. Algorithms allow these investors to buy shares at the best possible price.
Then there, is high frequency trading or HFT which is a sub-set of algo trading where large number of small sized orders are placed in a matter of seconds.
India’s market regulator has often expressed its concern against such trading. Sebi chief U.K Sinha has often warned about the risks that it poses to the system.
Experts contend that algo trading can cause huge price swings in a very short of span of time ,thus affecting many investors. In fact, there have been various instances of crashes both in the overseas and in the domestic markets.
There was a flash crash in the Dow Jones Industrial Average on May 6, 2010 and the index lost 600 points only in few minutes. Back home, the BSE had to annul all derivative trades during Mahurat session last year due to huge volatility that was blamed on algorithmic trading.
SEBI said that for stock brokers or trading members of exchanges not having nation-wide trading terminals, the deposit requirement will be 40 per cent of the BMC deposit requirements.