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Will Direct Market Access Impact Volumes?

Author: Dasari Sreenivasa Rao/Wednesday, August 5, 2020/Categories: Exclusive

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Will Direct Market Access Impact Volumes?

The uproar among the broking community against the proposed Direct Market Access (DMA) for retail investors, the Union Finance Ministry seems to be in a rethink mode. If the decision on DMA comes into force, then it’ll erode the business of broking firms, which not only facilitate traders and investors with trading platform, but also provide research and other support services as well. However, the government may soon have a decision to make, whether to encourage retail investors to participate in DMA to the stock market. The proposed DMA allows retail investors to take up direct trading without involvement of broking firms. However, Sebi will soon take a decision in this regard whether to allow retail investors or not. Further, with recent diktats from Sebi on margins and intra-day trading have caused a sense of uneasiness among the broking community and retail investors.

Brokerage firms are intermediaries between traders and stock exchanges. Voicing concerns over the DMA proposal, the stock brokers have petitioned the Union Finance Ministry and Sebi on circulars, which if implemented is feared that it will have the effect of reducing trading volumes drastically and wipe out number of brokers.

The new circular from Sebi will have a greater negative impact on the derivatives trading as it’s expected to suck out the liquidity from the system. Hence, the derivatives segment will also suffer as volumes will dry up to a great extent. Further, this chaotic situation will impact the livelihood of many retail traders.

A Hyderabad-based broker opined that instead of enforcing a ban on intraday leverage, it should be left to the brokers’ discretion with minimum controls at place.

“Sebi can’t impose penalty on us and this is not the way of running stock market in a country like India where there is so less participation in capital markets,” observed the broker.

Ever since the Securities and Exchange Board of India (Sebi) issued circular on July 20, 2020, it has been creating tremors across the nation. The circular will ban the intraday leverage in a phased manner by December 1, 2020. According to the circular, traders and investors will now have to maintain upfront margin in their account to receive leverage from brokers.

The latest circulars from the market regulator coincide with an important new trend in the form of an unplanned and sudden entry of millions of new retail investors in the stock markets during the lockdown and Covid-19 phase. Majority of employees, who have lost their jobs or suffered pay cuts, have got into trading space as they were sitting at home during the lockdown and normal economic activity was curtailed.

“Broking and retail trading community are a worried lot over the Sebi circular to ban intraday leverage. We don’t know whether Sebi chief, who’s on extension, can take such a key decision on DMA. Anyway, we approached Sebi and Union Finance Ministry as well. Thousands of brokers across India will become jobless if DMA is implemented. We hope the finance ministry will take a positive decision in our favour,” said a NSE broker.

Nithin Kamath, co-founder of Zerodha, in his tweet shared his concerns by questioning that “if DMA is allowed to retail investors, can exchanges take place smoothly, along with acting as a regulator to regulate itself when it comes to customer grievances? Maybe not.”

The other contentious circular pertains to the pledge/re-pledge process. To prevent this misuse, Sebi had banned the title transfer collateral system and proposed to replace it with a pledge/re-pledge process, which would be transparent so that an investor knows the exact status of his shares. This new mechanism of pledge/re-pledge was to come into effect from August 1. In addition, the bourses following Sebi directions have mandated that the proceeds of the sale of shares can’t be used to purchase stocks till the money is credited in the client’s account. All of these are having the effect of drying up liquidity for retail investors and making it difficult for brokers to sustain.

Responding to the Sebi circular, the Association of National Exchanges Members of India (ANMI) wrote to Union Finance Ministry and Sebi on the issue of pledge of shares.

ANMI members expressed concerns over the circular pertaining to pledge mechanism for funded stocks. ANMI in the letter mentioned that “in view of the concerns of the broking industry and software vendors, ANMI submits to your good offices to consider granting extension of implementation of Sebi Circular for next two months and allow the existing system of crediting the funded stock to earmarked funded stock DP account.”

ANMI has urged the Centre to ease out the present situation. “The transition from the old regime to the proposed pledge and re-pledge process in such a hurried manner is fraught with great risks and will completely break down the day to day processes and operations of all market participants leading to unmanageable chaos and total breakdown. How can all the stakeholders in the entire eco system manage to transition to the new processes in such a hurried manner,” ANMI said in the letter.

“On average, intra-day trading contributes about 90 per cent of the total volume on the bourses. Moreover, top-10 brokerage firms account for over 65 per cent of the trading. Retail investors, businessmen and brokers largely participate in the intra-day trading. A significant chunk of retail investors totally depends upon day-trading as it’s become a full-time profession for them,” said the NSE dealer.

If DMA is implemented, it’ll hammer down the liquidity, volumes and financial opportunities to thousands of retail investors, business firms to a great extent, he further added.

During the lockdown from March 25, entire economic activity came to standstill across the world. However, the financial market is the only exception to this. In fact, it grew significantly during the lockdown phase as it created numerous opportunities to generate revenues. Several salaried people, after losing jobs or suffered pay cuts, entered the trading space.

The Sebi circular came at a time when the entire country is suffering from pandemic and the fate of making a livelihood is at stake. The intra-day trading gave a little hope to many salaried people. At this juncture, implementation of this circular will make it difficult for the whole trading community to explore any such opportunity. During this pandemic, many individuals including housewives are turning towards intraday trading for their livelihoods.

“Moreover, our earlier submissions on the glitches in the methodology of penalising clients for cash margin with respect to sale of shares, BTST trades, the early pay in timelines, etc; are still open and not yet addressed. We once again reiterate our earlier plea for the simultaneous running of the old and new proposed processes for the next two months to ensure smooth transition which will be to the benefit of all,” ANMI said.

Sebi Chairman Ajay Tyagi is on a six-month extension of his tenure and there’s no clarity on whether he will get a further extension after August. The IAS officer of Himachal Pradesh cadre has served a three-year tenure, following which another six months extension was given by the government. All the latest circulars came at the fag-end of the extension given to Tyagi.

The writer is a business journalist with 27 years of experience

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