As the market consolidates, and a sense of optimism grows, especially with the crude oil prices easing, rogue day traders seem to be returning in droves. Like earlier, they seem to prefer to beat the system by flouting trading norms.
The traders had in late December 2007 and early January 2008, by borrowing and leveraging their net worth, continued to build up speculative positions in the market. During this time, day traders and high networth individuals had were trading to the extent of Rs 7,000 crore a day, three times that of the foreign institutions.
However, when the market started becoming shaky, these traders had to unwind their positions and thereby accentuated the fall and causing credulous investors to lose out. Even now, albeit at a lower level, daily trades volumes at around Rs 3,500 crore levels, match that of foreign institutions. However. the extent of leveraged trading is much lower than the heady days, says a broker.
Despite several efforts by the authorities, the punters have been breaching the know your client (KYC) norms. The modus operandi is to open multi-accounts with various sub-brokers and stretch their business to all the sub-brokers. They tend to prefer sub-brokers who are ready to relax brokerage charges. Technically, as per the KYC norms, traders have to mention their simultaneous account positions with other brokers.
However, after defaulting with a sub-broker, traders simply move over to another sub-broker.
Arun Kejriwal , director, Kejriwal Research and Investment Services, ?The trade-off favours of traders more than the sub-brokers. So it is the sub-broker which is in a fix and not the client. Clients breach the KYC norms and it is virtually impossible to catch them. In the current meltdown, we saw many such elements washing their hands off at one place. They are now trying their hands at other places.?
A vice-president in a compliance department of a leading broking firm said, ?The KYC norms are rich in intension but poor in implementation. Many retail and high net worth clients breach the norm by not mentioning their other broking accounts. Even as it would seem that the client has stopped trading from one particular sub-broker, he could have already started to trade from another account. However, it is possible from the exchanges to identify such breaches as the form will have the same PAN number and catch hold of such elements?
Though an adequate margining system has been put in place by the exchanges and markets regulator to take care of the default risk, it is impossible to totally get rid of all the risk in totality, reckon brokers.
In April Securities & Exchange Board of India (Sebi) had proposed to strengthen the KYC norms. Though not implemented, the policy says that the exposure limit, set by the broker for their clients, should be commensurate with the financial details reported by the client KYC documentation.
The said limit must be specified in the KYC and strictly adhered to or the details in the KYC must be suitably modified. It further adds that only persons with a financial standing comparable to that of the client should be accepted as the introducer.