Recently, Zerodha Broking has blocked new purchases in all illiquid penny stocks as well as illiquid option contracts. According to Nithin Kamath, founder and chief executive officer of the online discount brokerage, phishers and ‘fraud advisers’ used these instruments to ‘intentionally create losses’.
“We have blocked new purchases in all illiquid penny stocks and illiquid option contracts that we believe can be used for executing trades to intentionally create losses, both by phishers and fraud advisers. Hoping other brokers do the same to stop this sudden increase in frauds,” he had tweeted.
A few traditional brokerages have either suspended trading or discouraged by imposing hefty margins on crude oil citing excessive volatility. Among them are Motilal Oswal Commodities and Angel Commodities. A few large brokerages and discount broking houses have also raised margins for crude trading by 100-300 per cent irrespective of the exchange’s margin.
While this has been welcomed by a large section of traders, some questioned the brokers on the move and asked the brokers to provide complete access to the markets. A few believe illiquid/penny stocks could be multi-baggers and volatile contracts provide huge profits and, therefore, they demand informed traders should not be deprived of the opportunity to trade in these.
So, do brokers have the right to deny customers access to certain products that are on the exchange platform? According to SEBI rules, they are within their rights to impose such restrictions.
A note from Kotak Securities says “We define penny stocks as those stocks where the market price is below or close to par, with the company financials being weak with indicators such as loss, accumulated losses, low sales revenue, low or negative net worth, signs of inactivity in the company, which are having very less value.
“KSL may from time to time identify such stocks and put trading restriction on the trades in such penny stocks. In addition to these stocks, KSL may also include other stocks in the list of restricted stocks such as stocks in Z category, Trade to Trade Settlement or TS category, the scrips which are included in the list of illiquid scrips by the exchange/s or any other scrip which KSL deem fit for the purpose putting trading restriction.”
KYC sanction
While submitting their KYC norms, clients also sign off on enormous powers to brokers, among them are clauses authorising the above.
Following the negative settlement pricing in crude oil futures, even the US commodities regulator, in fact, asked brokers to ensure their customers and members have appropriate information on the risks and technical elements of contracts and trading around upcoming expirations.
In fact, a couple of years of back, market regulator SEBI had proposed linking an individual investor’s exposure to equity and equity-related instruments such as derivatives to their net worth. The main reason behind such move was to check individual investors going overboard on equity and derivative investments beyond their risk-taking capabilities. Had SEBI approved that proposal then, now, the major responsibility would have fallen on brokers on checking worth criteria of clients.
When the thinking of regulators is on such lines, the noise made by some traders about brokers placing restrictions appears unnecessary. And that too, when the main intent is to protect them.