Will the new SEBI margin rules hit intraday trading in India?

The recent restrictions imposed by SEBI on leverage in equity and F&O is likely to be a dampener for volumes on the intraday trading front. But in the longer run, it may actually end up beneficial to the markets.

Big intraday question

In the last few days, SEBI put some restrictions with a view to curbing the rampant spread of speculative intraday trading. The first measure was to insist on full payment of margins for buying and selling of stocks. While buyers anyways had to pay full margins even in the past, the problem arose in selling. Now, even if a trader wanted to sell intraday, substantial margins would be applicable on the position. Else, the trader will be asked to make a pre pay-in of the shares to avoid paying the margin. But the bigger problem for traders arises on the intraday trading in derivatives (futures and options). The regulator has fixed the basic minimum margin at 12.5% for all positions in F&O. that would restrict the overall leverage in F&O to just about 8 times. Brokers will now have to collect VAR margins plus Exposure Margins even for intraday trades. Even if the trade is clearly an intraday trade, these margins would apply. Currently, brokers offer lower margins for cover trades and bracket trades. Now even that will go. In short, the scope for leverage is being substantially reduced and that is likely to have a bearing on F&O volumes.

Some likely effects

This move could have a number of effects but we can broadly summarize the key effects as under. Firstly, it will surely compress the intraday trading volumes in the market since most of the trades continue to be heavily leveraged. Also, intraday trading platforms will now lose the leeway of cover orders. Secondly, this move will also hit option sellers. There used to be a lot of option selling happening in deep OTM options and also in stocks that were not too liquid. These higher margins applicable on option selling positions will largely make these non-lucrative. Lastly, we could see a greater shift in volumes towards institutions. One Nifty contract with a notional value of Rs.8 lakhs will entail a minimum margin of Rs.1 lakh even on intraday trades. That would mark a clear shift from intraday traders to institutions in the options space.

It is long term positive

While short term hiccups are likely to be there, this is likely to be beneficial in the long run. The prevalence of speculative volumes and tax transfers in illiquid options will substantially reduce. Of course, greater institutional participation will also mean that the futures and options market become more machine driven and less accessible to the retail investors. But that is the way it is in most developed markets. It will be the right step in that direction!