Donning regulatory role — a right step by brokers

KS Badri Narayanan Chennai | Updated on May 15, 2020

Recently, Zerodha Broking blocked new purchases in all illiquid penny stocks as well as illiquid option contracts. According to Nithin Kamath, founder and chief executive officer of the online discount brokerage, phishers and ‘fraud advisers’ use these instruments to ‘intentionally create losses’.

“We have blocked new purchases in all illiquid penny stocks and illiquid option contracts that we believe can be used for executing trades to intentionally create losses, both by phishers and fraud advisers. Hoping other brokers do the same to stop this sudden increase in frauds,” he had tweeted.

A few traditional brokerages have suspended/discouraged trading in crude oil by imposing hefty margins, citing excessive volatility. Among them are Motilal Oswal Commodities and Angel Commodities.

A few large brokerages and discount broking houses have also raised margins for crude trading by 100-300 per cent irrespective of the exchange’s margin.

While this has been welcomed by a large section of traders, some questioned the move by the brokers and asked them to provide complete access to the market. A few believe illiquid/penny stocks could be multi-baggers and volatile contracts provide huge profits; and therefore, they demand that informed traders not be deprived of the opportunity to trade in these instruments.

So, do brokers have the right to deny customers access to certain products that are on the exchange platform? According to SEBI rules, they are within their rights to impose such restrictions.

A note from Kotak Securities says, “We define penny stocks as those stocks where the market price is below or close to par, with the company’s financials being weak, with indicators such as loss, accumulated losses, low sales revenue, low or negative net worth, and signs of inactivity in the company.

“KSL may, from time to time, identify such stocks and put trading restriction on the trades in such penny stocks. In addition to these stocks, KSL may also include other stocks in the list of restricted stocks such as stocks in Z category, Trade to Trade Settlement or TS category, the scrips which are included in the list of illiquid scrips by the exchange/s or any other scrip which KSL deems fit for the purpose of putting trading restriction on.”

Regulators’ nudge

While submitting their KYC norms, clients also sign off on enormous powers to the brokers. Among these are clauses authorising the above.

Following the negative settlement pricing in crude oil futures, even the US commodities regulator has asked brokers to ensure their customers and members have appropriate information on the risks and technical elements of contracts and trading around upcoming expirations.

In fact, a couple of years back, market regulator SEBI had proposed linking an individual investor’s exposure to equity and equity-related instruments, such as derivatives, to their net worth. The main reason for the proposed move was to check individual investors from stretching themselves beyond their risk-taking capability on equity and derivative investments. Had SEBI approved that proposal then, now the major responsibility would have fallen on brokers on checking the worth criteria of clients.

When the thinking of the regulators is on such lines, the noise made by some traders about brokers placing restrictions, appears unnecessary. And that too, when the main intent is to protect them.

Published on May 15, 2020

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