How brokers put stock mkt at risk Two Cos Placed Orders Up To 271 Times Their Margin Deposit

Mumbai: The recent legal battle between Emkay Global Financial Services and NSE in the Securities Appellate Tribunal (SAT) has revealed details of how some brokers, with complete disregard to the trading rules laid down by bourses, play with the system and put the entire market at risk.
    According to NSE's showcase notices to Inventure Growth & Securities and Prakash K Shah Shares & Securities, the two brokers had put in orders worth between 144 times and 271 times their margin deposits while bourses allow exposures of not more than nine times the margin in most liquid of stocks.
    A margin deposit is a builtin safety system for the exchange under which brokers keep money in the form of cash, fixed deposits and bank guarantee with the bourse and the volume of trade they can undertake is a multiple of this margin. The simple rule of the trading game is higher the trading exposure-margin ratio, higher is the risks involved for the market.
    The NSE showcase notice to Inventure mentions that against a total deposit of Rs 4 crore, it had placed orders worth Rs 1,083 crore, which is 271 times its margin money. On the other hand, Prakash K Shah had a margin deposit of Rs 2.88 crore and had placed orders worth Rs 416.71 crore, or 144 timers its margin.
    These brokers regularly placed such orders that broke the margin rules.
    These facts came to light when on October 5, 2012, a dealer at Emkay Global entered some erroneous trades worth about Rs 960 crore for 50 stocks that constitute the nifty index, quoting prices which were far lower than the previous levels. As a result, within 2 minutes nifty had crashed 15.5% and the trading was halted for about 15 minutes by NSE officials.
    Subsequent to the trades and squaring off of its positions by Emkay Global, the total loss to the brokerage was about Rs 51 crore. The brokerage has moved SAT to reverse the trades of that day in which some brokers had made illegal gains.
    The showcase notices also show that these two brokers had placed orders worth thousands of crores on behalf of clients who had annual income less than Rs 1 crore. For example, NSE notice to Inventure noted that the broker had placed orders worth about Rs 1,083 crore on behalf of a client that had an annual income of Rs 57.5 lakh. Prakash K Shah had placed an order worth Rs 116 crore on behalf of a client that had annual income of not more than Rs 10 lakh.
    Subsequent to the notice, Inventure was fined Rs 50 lakh and Prakash K Shah Rs 40 lakh, with 50% of the penalty amount as suspended, meaning these entities will get back half the amount if they do not break any rules for the next six months.
    Atop Inventure official said that the brokerage was contesting NSE's penalty at SAT. Calls to Prakash K Shah's main office in Fort area in Mumbai remained unanswered.
    SAT has fixed July 23 as the next date of hearing in the Emkay Global-NSE case.
CRASH COURSE THE CASE
    On Oct 5, 2012, NSE nifty crashed 15.5% in 2 minutes after an Emkay Global dealer entered erroneous trades worth Rs 960cr; trading was halted for about 15 minutes WHAT'S A MARGIN DEPOSIT?
    Abuilt-in safety system under which brokers keep money with the exchange in cash, FDs and bank guarantees and can place orders up to nine times this deposit
WHAT DID BROKERS DO?
    Besides placing orders up to 271 times their margin deposit, they are also accused of putting in orders worth thousand of crores for clients who had annual income of less than Rs 1 crore