The dabba traders -- the Indian equivalent of US bucket shops -- are close to shutting down their business across the country, following the sharp rise in equity prices in the last one month.
Also, investigations launched by the Securities and Exchange Board of India in the recent past, has forced dabba traders to beat a hasty exit.
A dabba trader based in Ghatkopar, a Mumbai suburb, told Business Standard, "There have been almost no deals as most of the operators in dabba trading have closed shop."
He also added that almost all dabba traders in all the major centers such as Kolkata, Rajkot, Bhuj, Mathura, Mangalore, Ahmedabad and Mumbai are close to shutting shop.
Brokers also point out that dabba trading works only if there is a two-way movement in stock prices, but in the last few months the markets have more or less moved one way only and most retail customers have been bullish.
"This in turn does not allow for the dabba trader to hedge his positions or trades. Dabba traders are most active in a volatile market which can move both ways, as this gives them the opportunity to make a big buck on either side. But in a bullish market these operators tend to loose money," he explained.
Popularly known as kachha sauda, dabba trading is essentially handled by brokers who operate as mini-exchanges. The system predominantly works for traders with a huge appetite for risk.
There are no records for the authorities to dig up at a later date as everything is based on word of mouth and trust.
The main attraction for investors is that nothing is official and it saves them from declaring income and paying tax on it as there are no official records.
Dabba traders were active on most scrips on the futures and options market, including Reliance Industries, DigitalGlobal, Infosys Technologies, Satyam Computer, Telco, Tisco and Hindustan Lever seeing heavy volumes. Recent additions were MTNL and Tata Power which are said to have caught the fancy of traders, according to market sources.
The sudden surge in dabba trades, with volumes reported to have crossed Rs 6,000 crore (Rs 60 billion) per day, had caused concern among brokers who deal only in the official trading systems.
"They operate in a darkness," a broker points out. "This also leads to siphoning of liquidity from our regulated markets to the shady back office dealing rooms.