The new-age investors who joined the stock market during the lockdown will adapt quickly as they are not used to high leverage trading products. Sebi’s guidelines on upfront collection of margins won’t affect their trading much, Tejas Khoday, Co-Founder & CEO at FYERS, says in an interview to Moneycontrol’s Sunil Shankar Matkar. Edited excerpts:
Q: What are the key things that investors and brokers should know about Sebi’s framework for verification of upfront collection of margins from clients in cash and derivatives segments? What is the process and what are your thoughts?
As per the Sebi circular dated July 20, the collection of upfront margins will come into effect on December 1, 2020 and will be implemented in a phased manner through 2021. My thoughts are that the glory days of high-leverage day trading will soon be history. Leverage is a double-edged sword only up to a point. Beyond that, it is single-edged and pointed towards oneself.
Many brokerages in India offer exorbitantly high-leverage in the intraday segment but only a small percentage of traders know how to handle it. Largely, it encourages excessive risk-taking behaviour among new investors who have little to no knowledge before indulging in it and it ends up burning their capital either because they don’t know how to trade volatility or get unqualified advice.
Q: Do you see any impact of the move on retail investors who joined the stock market during lockdown?
The new-age investors who joined the stock market during the lockdown will adapt quickly as they are not used to high leverage trading products, yet. It won’t affect their trading much. This crowd generally has a larger timeframe and thus take delivery of shares into their Demat accounts. So, the upfront collection of margins won’t affect them.
Q: What will be the impact on broking industry or traditional brokers, who allow trader to buy a stock and pay later, and on online brokers?
Overall, the volumes will decline because intraday trading contributes a significant portion to the pie. If you see the total trading volumes in context of the actual capital being deployed, it is almost incomparable. The ability to trade with leverage is what encourages speculative activities and when that is gone, it will inhibit trading to some extent.
Online brokerages will be affected to a much lesser extent when compared to traditional brokers. The business model of online brokerages is designed around a flat fee structure per trade. Hence, it never made sense to offer high leverage because the brokerage income per order wouldn’t go up anyway. But the same cannot be said of traditional brokers. Why? Because their brokerage charges are based on trading volumes, hence they are incentivised to provide higher leverage to increase brokerage income.
Q: What does this mean for intraday turnover and will it also impact arbitragers?
It is likely that the intraday turnover will reduce across the board, including the F&O segment. This is especially true for stocks that have higher VAR margin requirements and also the futures segment. The action will shift to options trading. There are various types of arbitrage strategies and how they will be affected depends on what their arbitrage strategies are. But overall, arbitragers are well-capitalised institutions or trading desks and they won’t face any hindrance.
Q: Do you expect more stringent rules from Sebi in the coming days to protect investors?
We expect Sebi to continue to refine the rules of the game. It’s an ongoing thing and the policy changes are a reaction to the ground realities. Sebi’s recent policy decisions will help curb malpractices to a large extent, so, we expect a more level playing field for new-age brokerages and a stable environment going forward. I think the power of attorney favouring stockbrokers is an area where we expect policy changes.
Q: The market has rallied 48 percent from its March lows and most of the leading sectors have participated in the run. Do you think it will continue? Do you think it is a mini-bubble and it is time to be cautious?
The recent upward surge in markets is largely attributed to retail investors’ participation. Lakhs of new investors entered the markets during the lockdown and invested in a hurry and ended up making money. So, I think they will continue to invest and more people will enter the stock markets in the lure of quick profits.
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