Intraday Trading In Stock Markets To Be Hit By New SEBI Rule

For every market participant, it is imperative to be attentive to the latest stock trading rules. The Securities and Exchange Board of India (SEBI) has issued new guidelines to strengthen the stock market’s regulative framework. Here is the post giving insights into modified trading procedures and their impact on intraday traders. As most of the new rules are related to margin, let us start with an introduction to margin trading facility and intraday trading. 

What is Intraday Trading?

Intraday trading is aimed at attempting profits from short-term fluctuations in the stock market. Day traders buy and sell stocks within the same trading session. Thus, stocks are purchased to earn short-term gains and not for investment. Most day traders make trades using the margin trading facility

What is Margin Trading Facility?

When you borrow funds from your stockbrokers to place intraday trades that you can not afford at any point in time, it is called margin trading. You can buy stocks by providing a marginal amount of the actual trade value either in cash or demat securities. Margin trading facility leverages the trader’s position in the market as the broker funds the margin trading transactions that settle later. Margin trading can enhance profits as well as losses equally.

Let us move to new new rules laid by SEBI to answer ‘how to trade online’ after changed rules and its impacts.

SEBI’s New Trading Rules and Procedures

Margin Pledge

  • Nowwards, you need to pledge securities with your stockbrokers to use your demat securities as margin. Before this rule, if traders wanted to utilise their securities as margins, they required a Power of Attorney (POA) only. But now, creating a margin pledge is mandatory for online trading using margin facility.

Upfront Margin collection in cash and derivative segment

  • Another new rule is the upfront margin in the cash and derivatives segment. Traders utilising the margin trading facility need to provide 50% margin before executing delivery trades. Brokers will continue to pay 100% margin to the exchange, out of which 50% is to be paid by the brokers from their own capital, and the balance of 50% will be collected from the trader. There should not be any cross-client funding. At present, the rule of 100% upfront margins is applicable to day traders in the derivative segment only.
  • Before this new procedure, there was the concept of the ‘T+2 day’ system, and a trader was allowed to pay the entire trade value in 2 days after initiating the trades. 
  • If the broker fails to collect the upfront margin, they will be penalized. They need to report to the exchanges on client margin collection. The upfront margin rule has restricted the brokers from providing huge leverage to traders. 

Peak Margin Reporting

  • Peak margin reporting is another newly introduced concept. As per the SEBI circular, clearing corporations will send a minimum of four snapshots of margin requirements to trading members (TMs)/clearing members (CMs) to know the intraday margin requirement for every client in each segment. It has also notified that snapshots in a day are subject to change depending on market timings.
  • Margin penalty is subject to calculation on the basis of higher peak margin reported during the day. It simply means no more intraday leverage.

Effects on Intraday Trading

Estimates show that around 35% of intraday trading turnover is based on margin. Brokers were offering 33x leverage against a small fraction, say 5% of total trade value, and this leverage could go as high as 100x. Traders were able to trade high values using excessive leverage. But such leverages could incur huge losses more than the capacity to pay. Huge unbearable loss is one of the main reasons for default by the trader. 

Now, brokers are not allowed to determine their own margin limits. They need to follow the Peak Margin valued at risk (VaR) margin and extreme loss margin (ELM) by the exchanges based on volatility. It will affect full-service brokers adversely as they tend to provide additional margins for their trading services. 

It will safeguard traders from huge losses and brokers from the client’s default risk. But with the increased margin, traders need to maintain a lot more margins to initiate day trades. The increased margin can shrink the total turnover by approx 20%. Still, it can be concluded as a positive note in the interest of investors. 


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