Forex

Did brokers see the slide (from January) coming? The answer could be yes, if the Bombay Stock Exchange’s statistics on proprietary investments are any indications.

The over Rs 19,000-crore worth of proprietary book investments over the past seven months highlight the fact that many brokers are still flush with funds. One explanation could be that these brokers had booked profits while the market was on an uptrend till January. That money is now being steadily ploughed into the beaten down shares.

While investors, FIIs and domestic institutions sold mercilessly during March and April, the prop books of brokers show net purchases on all months since January. Brokers bought shares worth Rs 2,092 crore, Rs 3,448 crore and Rs 3080 crore in March, April and June, respectively. According to sources, July is expected to log record investments with about Rs 3,377-crore worth of broker money already invested in the market.
Towards end-January, margin funding had dried up for most brokers. Brokers with surplus cash would have invested in market or scrounged for arbitrage opportunities,” said India Infoline vice-president (strategy) Harshad Apte.

Brokers’ proprietary positions, where they invest their own money in the stock market, have been on the rise, with the numbers very high in the futures and options market. The increase in brokers’ own investments in the markets is conventionally seen to conflict with the positions they take on behalf of their clients, market experts opine.

According to data from the NSE, in the futures and options segment the average daily proprietary position of nearly 80% of the brokers was above 20% for June. The proprietary position of brokers holding 100% in the segment has shot up from 60 brokers in January to 64 in April and 72 in June. A 100% proprietary holding indicates that their (broker’s) entire investments for the month were for themselves rather than their clients.


“About 25-30% of the 600-strong active brokers (those who trade on a day-to-day basis) only trade in their proprietary accounts. Most of them do not have clients worth mentioning,” said Fortune Financial Services managing director Nimish Shah. According to Mr Shah, several brokers anticipated the market to correct considerably in January. However, none of them would have ever expected the market to enter a bearish phase, he added.

A section of the market attributes the rise in proprietary positions to brokers doing arbitrage between the cash and derivatives market. This is evident from increased proprietary investments in the derivatives market over the last few months, brokers opine.

“Brokers are largely resorting to arbitrage transactions where the risk of loss is minimal. Such trades cannot be called naked investments or even positional calls. Many of them could just be hedging their positions in the cash market,” said Edelweiss Capital managing director Rasesh Shah.

“Most brokers would not have that kind of money (referring to Rs 19,370 crore) with them to invest in market. They have to maintain capital adequacy; no broker would like to place his capital in positional risk by investing in such markets. As a matter of fact, about 50-60% of brokers’ capital lies with the exchanges,” Mr Shah added. He also attributed the rise in proprietary investments to several brokers (about 50% of all brokers) only doing only proprietary trading.