The myth of direct market access to retail investors

KS Badri Narayanan | Updated on August 07, 2020 Published on August 07, 2020

It may not happen anytime soon, as playing the role of a broker will be a huge task for bourses

There have been heated debates on social media and in some sections of mainstream media on Direct Market Access (DMA) in recent times. According to reports doing the rounds, the Securities and Exchange Board of India has streamlined the DMA facility, which gives investors direct access to the stock exchange’s trading system bypassing the traditional broker route.

While some hailed the decision as path-breaking, as it would eliminate an unnecessary intermediary and thus save costs, others felt that the importance of brokers cannot be ignored in the current trading set-up. Some even predicted the end of the broking business.

Talks of DMA have been reverberating loudly since SEBI came out with a new set of upfront margin rules that were supposed to kick in from August 1, but was again postponed by a month.

No SEBI circular

However, the sudden talk of the DMA has no basis and it appears that these are only rumours. The hard truth is that SEBI (or exchanges) has not come out with any new circular on DMA recently. In fact, the last circular on DMA (operational purposes) issued by SEBI was on August 2, 2012. SEBI first mooted the idea of DMA in 2008 and in February 2009 it had allowed institutional investors to use the facility for investment managers.

In August 2012, it had widened the scope to allow retail investors also to access the DMA facility.

Even then, the brokers need to specifically authorise clients or investment managers acting on behalf of the clients for providing the DMA facility, after fulfilling Know Your Client (KYC) requirements and carrying out necessary due diligence.

As per the guidelines, the investors seeking to avail the DMA facility would not have to enter into a separate ‘broker- client agreement’; instead, it would be replaced by a simpler ‘terms and conditions’ document, the regulator had said.

So, that means DMA is not without a broker, but would work through their order management system. The difference is it will happen without the manual intervention of brokers. The idea is to help clients gain direct control over orders, faster execution of their orders and reduced risk of errors associated with manual orders. So, the talk that DMA will reduce costs to the clients, is also a myth.

Several jobs for SEs

The DMA, in its full sense, will not happen anytime soon, since taking over the role of a broker is not easy for exchanges. Broking involves several functions such as KYC verification, issuing contract notes and updating clients on their combined margin limits across exchanges. Other back office duties include giving them periodical statements of profit and loss and other portfolio statements after consolidating their transactions, and constantly updating those with the exchanges and SEBI, and going forward with the Income-Tax Department and ED offices too. All these need strong staff strength, which will come at high cost.

If there is a client-level default, the responsibility currently rests with the brokerages, and exchanges will deal with it at arm’s length.

If the bourses take up this duty, it will pose a huge systemic risk, as default by a single client would be like a Karvy-like situation for the bourses. On days of extreme volatility, the problems would be compounded and could put every trader under systemic risk.

So, trading without a broker may not happen any time soon.

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Published on August 07, 2020
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