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SEBI has become strict regarding the Proprietary Trading Activities conducted by brokers for their own gains. Small investors are the ones who get trapped in the manipulations by brokers. Such trades are conducted by brokers for their own gains and not for the clients. Now brokers would have to strictly disclose about their proprietary trades and ensure a “Chinese Wall” like structure between these trading activities and the trades conducted by them on behalf of their clients.
What is Proprietary Trading
- When an order is put through a trading terminal, it has to be either a proprietary trade or a client trade. In Proprietary Trading brokerage firms trade in stocks, bonds, currencies and commodities among others with their own fund rather than customers money in order to make a profit for itself. If the trade is done on behalf of the client the broker needs to collect margins from the client.
- If the broker tags the trade as being proprietary the margin requirement will be adjusted from the brokers funds already deposited with the stock exchange as part of net worth compliance.
Why Brokers are Misusing Client transactions??
- Brokers are representing client transactions as proprietary trades so that the margin requirement gets evaded and taxes get saved and the amount that client gives as margin will be profit for the brokers. Also some proprietary brokers are also allegedly sidestepping SEBI regulations by illegally letting out their terminals to clients by passing them as employees.
NSEL Crisis and Proprietary Trading
- The NSEL Crisis of 2013 estimated Rs 6000 crore payment crisis in which some of the stock brokers and portfolio managers had come under the regulatory scanning for inducing HNIs and other investors to trade on spot market commodity exchange with promise of high returns.
- SEBI had received complaints that the brokers were offering returns up to 15% to their clients by asking them to place one day buy orders for various commodities on NSEL platform followed by immediate sell orders to be executed in next few days. Many Brokers also had taken proprietary transactions on NSEL with their own or client money as a hedging instrument in the wake of dwindling returns of the markets.
New Policy to Keep a Track on Proprietary Trading
- SEBI is re visiting the Proprietary Trading Brokerage firms. SEBI inspected more than 200 stock brokers and sub brokers to check any possible non-compliance of norms to check money laundering and terror funding through capital markets.
- These inspections will focus on compliance of norms regarding anti-money laundering, settlement of account of clients on a timely basis, segregation of clients and proprietary funds/securities and KYC norms. SEBI has been taking various steps to prevent money laundering and terror financing activities through securities market.
- According to SEBI as there is rapid developments and greater integration of the financial markets together with improvements in technology and communication channels, there are numerous challenges which the authorities and institutions are dealing with. SEBI has included AML/CFT risks as part of its inspection of market intermediaries such as stock brokers, depository participants and mutual funds.
What Clients Need to be Aware Before Selecting Stock Brokers
- Credentials
Any organization that deals with money must have strong credentials. Before selecting broker , ensure that the firm is well known and branded. Also look for profitable brokers so there are less chances of default of margins
- Trading Platform
A broker must be selected according to your needs, who allows you to trade during crucial times and maximize the profits effectively. Brokers must offer basic charts and analysis of the securities which he is suggesting to invest to get a fair idea about the investment.
- Hidden Costs
Many brokers claim to have low brokerage. But some brokers pad up their annual maintenance charges and other visible costs to cover up for the hidden cost. Comparing specific cost across stock brokers in India can explain the inconsistencies and identify the real cost effective brokers.
- References
It is better to do a reference check before selecting the stock broker. A long standing track records and credentials along with commendable sales service is a must for investing in stock market through brokers. The process of identifying the broker in India might not be an easy process. So it is better to do a complete research , check for reference and then decide the best broker.
Conclusion
- Stock Brokers misusing client details, accounts, transactions and money are not new. SEBI has been thriving hard for controlling and taking strict actions against such malpractices. But ultimately the investors are the ones who face the consequences of such practices and it is advisable to be vigilant and understand the stock markets and trading process before investing.
