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Day trading on regulators' radar

Sebi, FMC considering regulations for disciplining individual investors for intra-day transactions

Rajesh Bhayani & B G Shirsat  |  Mumbai 

Day trading in is posing regulatory challenges, and the capital market and commodity futures market regulators are considering a higher degree of rules on these.

The global body of regulators, The International Organisation of Securities Commissions (IOSCO), had recently conducted a survey of emerging economies’ financial market regulators. It had concluded there was a need for regulating day trading activity in a better way, as unregulated or loosely regulated day trading could pose several challenges. In the equity market, proper compliance with margin deposit rules by day traders could solve some problems. Several brokers are allowing limitless day orders, subject to their being squared off by the end of the day. In commodities, the test of success of futures contracts lies in open interest (OI, or the total of derivatives contracts not closed or delivered on a particular day).

has said, in its recommendation note to regulators highlighting potential risks of day trading, that, “Day traders enter into short-term positions and are leveraged. They also use a variety of trading strategies like momentum strategy, contrarian investing, index arbitrage, statistical arbitrage, merger arbitrage, range trading, scalping, etc.” It further said day traders impart liquidity to the market but day trading combined with high frequency and algorithm trading might lead to market integrity concerns. In the US in May 2010, flash crashes due to rapid withdrawal of these traders had amplified the risk and intensified a liquidity crisis.

Day trading is defined as buying and selling of securities of similar quantity and type on the same day with the intention to close (square off) position before end of the day
Day trading regulations in emerging markets
  • INDIA Only a negative list of securities is issued (known as trade for trade) where day trading is not allowed. Also, institutional investors are prohibited from day trading 
  • BRAZIL Specifies criteria for high-frequency trades 
  • EGYPT Allows day trading only by high net worth investors.
  • MALAYSIA Registers day traders as proprietary day traders with prescribed qualifications and eligibility criteria 
  • THAILAND Day trading not allowed by those who have incurred losses till the loss amount is fully paid 
  • TURKEY Allows day trading at five times the margin amount in the day trader’s account on the previous day 
  • TAIWAN, EGYPT, MALAYSIA Prescribe registration or licensing requirement for day traders who also have to open margin account separately
  • TAIWAN, EGYPT AND THAILAND Have disclosure and reporting requirements

On the National Stock Exchange, algorithm trading accounts for 16.4 per cent of total trades, show June volume data. Even of the daily volumes of actively traded Nifty stocks, net delivery is only around 25 per cent. This was even lower at 20 per cent in early 2009, when the market was at its low, after the global crisis. In some stocks, net deliveries are as low as 10 per cent.

In emerging in general, says IOSCO, day trading increased between 2006 and 2009 but dipped between 2009 and 2010. It has not given any updates after that.

When asked, a spokesperson of the Securities and Exchange Board of India said they were studying these recommendations. The spokesperson for the commodity futures market regulator, the Forward Commission, said: “We are considering some regulations for day trading in commodity futures.” In the first place, moving in that direction, the Commission has already asked exchanges to regularly file information on the volume to OI ratio in each commodity. G S Sood, president, Society for Consumers’ & Investors’ Protection, Delhi, said: “Day traders and speculators provide liquidity to the market but in their absence, the impact cost for investors increases sharply. In terms of trading cost, the Indian market is at par with or better than the world but the impact costs here are much higher. Hence, to ensure they remain active in the market, there is a need for regulations. The key thing in the regulation should be to ensure that they pay proper and timely margins.”

Day trading is a profession; however, said Sood. “Investors should not try to became day traders, as, fundamentally, both are different. To make real money from equities, investors should remain choosy and long-term.”