‘Dabba trading’ in the country’s stock markets are on the rise. Of late, a large number of stock brokers have started recording client trades merely in their books and not on the trading platform of any exchange. These orders are matched in accordance with the exchanges’ price quotes and settlement done at the end of the day in cash, say brokers.
Such activity has picked up, as a result of the rising cost burden and regulatory issues faced for brokers due to stringent norms put in place by the exchanges for derivatives trading.
The National Stock Exchange (NSE) recently asked stock brokers to discontinue depositing shares of the clients to fulfil margin requirements of the exchange. Also, delayed payment norms were made stricter.
Dabba trading is derived from Bucketing, which was infamously carried out in the US before the Securities and Exchange Commission was set up in that country. There too, to save costs and taxes brokers had set up bucket shops, where trading bids were collected in a bucket.
“Dabba solves many issues. For brokers, it is less of regulatory and tax hassles. For clients too, it is beneficial, as they save on statutory costs. This may continue till the markets return to the bull phase and traders are able to make large profits to make do with several trading costs involved,” said a trader at a Mumbai-based broking house.
According to a circular issued by NSE on April 26 for the derivatives segment, brokers must deposit their own shares, and not those of their clients, with the clearing corporation (CC). Alternately, when a broker funds a client’s margin against shares, he can collect interest from the client. However, stock brokers say this increases the cost of trading and clients may object.
Earlier, clients, eager to cover their cash holdings, put up shares as margin with brokers to take a contrary position in equity derivatives. Brokers deposited these shares as collateral with the CC, which could sell the same in case of default.
However, now brokers are required to give a commitment to the CC that shares deposited are their own and do not belong to their clients. Brokers say this circular needs to be revised as it is inconsistent with Securities and Exchange Board of India’s (Sebi) circular of 2008. Sebi allows collection and deposit of collateral from clients with the exchange.
While there is still confusion over the recent circular and stock brokers have taken it up with the exchange, many are not taking any chances. Further, NSE too, has not given any further clarification, which means brokers will have to comply with the new set of norms.
While the cost of equities trading, including brokerage, in the US and Europe is around Rs 500 on trades worth Rs 1 crore, it is as high as Rs 1,200 in India. This is the reason why the US markets are more liquid. Traders can make profit in India only after 28 ticks, while in the US and the UK, just one favourable tick on index futures can generate a profit. In the US, the spread on the S&P contract, or one tick, is 25 cents. So, if a trader gets just one tick right, he can take home 20 cents, as the trading cost there is just five cents.
Trading costs in India involve around Rs 800 in the form of the Securities Transaction Tax. While Rs 200 goes to the exchange, Rs 200 is paid as stamp duty and Rs 21 as service tax. Also, Rs 10 is collected by Sebi. In addition, there is a brokerage. If trades are delivery-based, they attract depository and demat charges as well. While it may seem minuscule in percentage terms, it is a major burden, as a number of trading ticks are required to make a profit.
Earlier, dabba or illegal transactions were done online. This was when exchanges did not pay too much attention towards modification of client codes in the futures and options segment. However, this kind of Dabba trading was put to a halt by Sebi by introducing stringent client code changes.