Mumbai: The market collapse of last week was a shock stress test that the brokerages haven’t passed yet, with many terminals remaining unplugged due to un-reconciled margin issues.

Work got so compounded that some entities, who can’t be named, toiled through Saturday and Sunday to match payments and positions.

The result: clients are increasingly harried by their inability to trade, and market volumes have collapsed.
Some have even rioted.

“Traders have been dealing on an IOC (immediate or cancel) basis. You can’t even put a limit order, only a market order,” points out chartist Vijay Bhambwani. “This is greatly price-inefficient.” As a result, the market remains extremely shallow on low volumes. Swings, therefore, have little underlying meaning.

Motilal Oswal, chairman and managing director of the eponymous brokerage, said his staff had to work extra hours to clear the payment debris.

“In such unforeseen circumstances, it is natural that we needed to do the extra work. But as of now, there are no outstandings with our clients. We had a few cases immediately after last Tuesday. But those have been settled.”

The anomaly of having a T+1 trading sytem, but a 72-hour clearing system, apart from last week’s bank holidays added to tension.
Motilal says an inadequate banking system accentuated the crisis.

“My client is sitting in Guwahati and how will he get me the money, even if he wants to pay? I will have to pay for him. When the market tanks to such levels, there must be some effective lending and borrowing system from the banks to support the brokers.”

Dinesh Thakkar of Angel Broking concurs. “While the stock markets are highly efficient and function in real time, the banking system does not. It is this mismatch that’s behind most of the pain last week.”

Sandeep Singal, co-head, institutional derivatives, Emkay Share and Stock Brokers, says capital constraints created due to last week’s events continue.

“While a lot of brokers had to use their own creditworthiness to take loans from banks to meet pay-ins, issues between the client and brokers are still to be sorted out,” he said.

“Till some liquidity flows in the form of refund orders from the Reliance Power IPO or these investors manage to secure some bank loans or liquidate their investments, the pain will persist. Typically, these issues take 7-10 trading sessions,” he said.

Anita Gandhi, head of institutional business, Arihant Capital Markets, says refund orders from the Future Capital IPO will also start soon, bringing much-needed relief.

However, she expects there could be some hiccups on Tuesday morning. “Pay-ins for two days are clubbed on Tuesday due to the bank strike on Friday. This could create some angst given that there is still a lot of outstanding at client level.”

On Monday, the Sensex after tanking recovered most of its early losses to end the day at 18152, about 209 points lower than Tuesday.

The rebound was due to short-covering, which started on Friday. The trend is quite common on expiry eve because bears rarely —- if ever —- roll over their shorts, preferring to initiate fresh ones in a new series.

Brokerages adopting discreet methods to make good the loss of their bigger clients has spurred heartburn among the small fry.

This is because their loss might be small in denomination terms, but hurt relatively more.
“While brokers take a sympathetic view of high net-worth individuals whose business they do not want to lose, the smaller guys are left to fend for themselves,” said a dealer with a big local brokerage, who does not want to be named.

Some brokers are sending regret letters, apart from holding meetings with clients.
Yet others face problems of forced square-offs because the cheques they paid have not been credited to their accounts.

But Angel’s Thakkar said bigger brokers have been very considerate to their clients. “We have an internal system that judges the credibility of clients. In most cases, where we are satisfied with the credibility, we just took cheques and drafts and have protected their positions.”

Thakkar blames single stock futures which are actively traded in our market for the pain.
“Most developed markets do not trade in single stock futures and nowhere in the world they are traded in such huge volumes.There is a lot of chaos out there,” the dealer said.

 

Source : Dna