Mumbai: India’s stock market regulator has increased the capital requirement for brokers in an effort to mitigate risks arising out of algorithmic trading and insulate the markets from erroneous or manipulative trading activities.
The so-called base minimum capital (BMC) is a deposit made by a member of the exchange against risks other than market risk and includes operational risk and potential client claims. A broker cannot take any exposure for trades against his BMC deposit.
The Securities and Exchange Board of India (Sebi) has increased the range of the deposit to between Rs.10 lakh and Rs.50 lakh from Rs.10 lakh for brokers on bourses with nationwide trading terminals such as BSE, NSE, and the Calcutta Stock Exchange.
For members of other stock exchanges, the requirement would be 40% of the deposit on national level exchanges, said a Sebi circular.
Currently, according to Sebi, members of the Ahmedabad Stock Exchange and the Delhi Stock Exchange need to deposit Rs.7,000 and other exchanges Rs.4,000.
The order follows a 900-point flash crash of NSE’s 50-stock benchmark index, the Nifty, on 5 October due to erroneous orders worth Rs.650 crore placed by a broker on behalf of one of its clients.
The new rules will require brokers and trading members to deposit Rs.10 lakh if they opt for only proprietary trading without the algorithmic option, Rs.15 lakh for trading only on behalf of clients (without proprietary and algorithmic options), Rs.25 lakh for proprietary trading and trading on behalf of clients (without algorithmic trading) and Rs.50 lakh for trading with the algorithmic option.
The exchanges can prescribe higher deposits if they perceive greater risks for any broker. A minimum 50% of the deposit has to be in the form of cash and cash equivalents, Sebi said.
Algorithmic trading is automated high-frequency trading that’s capable of executing large orders rapidly.
“Over the years, the market structure has undergone significant structural changes. The various technological changes and the increased speeds of trading have brought to fore the greater quantum of risks arising during the course of execution of transactions. In light of this...it has been decided to realign the BMC requirements,” said Sebi.
Sebi’s latest diktat follows its move last Thursday to impose pre-trade order limits on the exchanges and enhance risk-management controls for the bourses.
The regulator has directed the exchanges to reject orders above Rs.10 crore for trade execution on equity, exchange-traded funds (ETFs) and derivatives.
Sebi has also tightened the initial price threshold for stocks under dynamic price bands. The capital market regulator ordered the exchanges to reset the dynamic price bands from 20% to 10% of the previous closing price for stocks on which derivatives are traded, stocks on indices on which derivatives are available, index futures and stock futures.
The exchanges will also have to put stock brokers on the so-called “risk-reduction mode” when 90% of their collateral available for adjustment against the margins kept with the clearing corporations is utilized.