Forex

The downturn in the stock market has been a period of learning for stock broking firms, it appears. After the battering of stocks, some of these broking houses have bolstered their risk management systems.

They are now paring the stock-exposure limits of investors besides not putting through trades in some illiquid stocks and implementing net worth criteria for F&O investors to mitigate unforeseen financial risks.

This new-found resolve shown by brokers comes at a time when the market is experiencing a major bout of volatility, contradictory trends and rapid price movements.

“Though most brokers had risk management systems in place prior to the January crash, not much was done to upgrade systems. But since the crash, almost all brokers have embarked on setting up sound risk management measures,” said Kotak Securities senior vice-president and broking division head E Prasanth Prabhakaran.

After the Sensex crashed in January this year, Kotak Securities has implemented a slew of measures to curtail risk. The brokerage has adopted a ‘controlled exposure’ strategy, wherein it will only allow a set limit (for each scrip) on margin held. The brokerage is said to have black-listed several illiquid stocks, refraining investors from taking positions in them. The brokerage has completely removed exposure limits for investing into ‘Z’ category stocks.

“Problems occur when retail investors try their hands on complex F&O segment. To discourage this, we have set our own net worth criteria (in terms of trading experience, financial status and risk profile) for investors wanting to trade in F&O segment. We normally do not allow investors above 60 years of age to trade in the F&O segment,” Mr Prabhakaran added.

According to Bharat Shah of Ventura Securities, most brokers have cut exposure limits to three times the margin money deposited with the brokers. Exposure limits used to be as high as eight times the margin money deposited, prior to January. Brokers do not compromise now when it comes to collecting upfront margin and mark-to-market margin (collected every evening), which was not the case earlier, Mr Shah added.

Some of the key parameters evaluated and validated by a risk management system (that involves software programmes, risk management research teams and algorithms) at brokerages, are exposure levels of investors , mark-to-market margin levels , cash and trading account balances (a part of margining system) and scrip margining.

“As part of strengthening our inhouse risk management system, we are liaisoning with banks that have core-banking facilities. This will help investors to meet real-time margin money requirement in the case of a rapid fall,” said Angel Broking executive director (operations) Amit Majumdar. The brokerage has also black-listed over 700 stocks, not fit for investors to invest.

Another way to lessen risk — as adopted by several brokers — is to encourage investors to trade online. According to experts, online trading helps brokers to keep their checks and balances tight; they can do it by simply running the order (placed by the investor) through a series of programmes that check on every risk parameter. A few brokers have also begun giving payment gateways options for faster fund transfer.