Brokers: Brokers expect volatility spike, make margin trading costlier

Mumbai: Some stock brokers have increased the cost of trading for clients in anticipation of heightened volatility around the Union Budget and the US Federal Reserve‘s policy meeting – two events that could have a bearing on the market direction in the near term.

In the first week of February, clients of these brokers must pay as much as 100% upfront margin for all new positions within the margin trading facility (MTF) in the cash segment in an attempt to discourage traders from taking excessive risks in the event of sharp swings.

MTF is a short-term loan arrangement that brokers extend to clients, who want to buy more shares than they can afford. Currently, several brokers charge the minimum upfront margin of 20% on such share trades.

5paisa Capital has informed its clients that due to the prevailing market volatility from January 31 to February 7, a 100% margin will be necessary for all new positions under MTF. Angel One has notified clients that in anticipation of market volatility surrounding the Budget, no new positions will be permitted in MTF from January 30 to February 6. Additionally, on January 30, Angel said VaR (Value at Risk) margins will be applied at a rate of 100% for fresh trades under MTF. VaR estimates the probability of losses in a share. IIFL Securities has increased the margin for MTF clients from 25% to 50%.

Brokers Expect Volatility Spike, Make Margin Trading CostlierAgencies

Funds borrowed for margin trading by clients hit a historic high of ₹57,000 crore this week, amid the heightened activity in the stock market. In January 2023, it was ₹29,500 crore, and about ₹7,100 crore in February 2020.Most brokers provide the Margin Trading Facility for nearly 1000 stocks. Depending on the client’s risk profile, brokers levy an interest rate ranging from 7% to 18% for the loan.Many broking firms told ET that their risk management teams are closely watching the margin requirements.”We have planned increased margin provisions to safeguard investor interests,” said a CEO of the broking firm. “Such steps are aimed at discouraging traders from taking risky positions with the help of borrowed money. They fear that if bets go awry, this might have a cascading effect on the market.”

Some traders, who have taken large positions ahead of the interim budget on February 1, may have to shell out more funds if brokers increase margin requirements, said analysts. Clients may have to allocate additional funds to continue with open positions. Failure to bring in more margins would lead to squaring off the positions.

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