The Securities and Exchange Board of India has allowed brokers to offer their institutional clients direct access to the exchange trading system through the brokers' infrastructure.
Called the direct market access (DMA) facility, this allows clients anywhere in the world to access the broker's trading platform without any manual intervention.
The DMA facility offers advantages such as direct control of clients over orders, faster execution of client orders, reduced risk of errors associated with manual order entries, greater transparency, increased liquidity, lower impact costs for large orders, better audit trails and better use of hedging and arbitrage opportunities through the use of decision support tools/algorithms for trading.
Brokers must specifically authorise clients for providing the DMA facility after fulfilling the Know Your Client (KYC) requirements. Brokers have been made liable for all DMA trades and must authorise individual users at the client end based on minimum criteria.
They will also maintain the records of user details, user-ID and authorisation. Brokers interested in offering the DMA facility will have to apply to stock exchanges giving details of software and systems proposed to be used, which will be duly certified by a security auditor as reliable, said the circular.
The broker will enter into a specific agreement with the clients for whom they permit the DMA facility, which will clearly state that the client will use the DMA facility only to execute his own trades and will not use it for transactions on behalf of any other person/entity.
The agreement will further include a clause, saying that the broker has the right to withdraw the DMA facility if the limits set up are breached or for any other such concerns.
Further, the client shall also agree to be bound by the various limits that the broker shall impose for usage of the DMA facility. Sebi has directed the exchanges to prepare a model agreement.
Based on risk assessment, credit quality and available margins of the client, the broker will ensure that trading limits/exposure limits/position limits are set for all DMA clients.
Brokers must ensure that all DMA orders are routed through electronic/automated risk management systems of the broker to carry out appropriate validation of all risk parameters such as quantity limits, price range checks, order value and credit checks before the orders are released to the exchange.
"All the DMA orders are subject to order quantity/order value limit in terms of price and quantity specified for the client. All the position limits, which are specified in the derivatives segment as applicable. Net position that can be outstanding so as to fully cover the risk emanating from the trades with the available margins of the specific client. Appropriate limits for securities which are subject to FII limits as specified by RBI," said the circular.
Brokers who are interested in offering the facility must apply to the stock exchanges giving details of the software and systems proposed to be used, which shall be duly certified by a security auditor as reliable.
Brokers point out that it is a welcome move as most markets in the world have made direct market access available to institutional clients.
"This could trigger a wave of consolidation within the broking industry since the buy side clients normally establish DMA only with brokers they are comfortable with. Thus, the small and marginal brokers could lose out on the business and eventually get taken over," said Sandeep Singal, Co-Head, institutional derivatives business, Emkay Share and Stock Brokers.
