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Introduction:

Direct Market Access has been a hot topic. On August 2, 2012, when the Securities and Exchange Board of India (SEBI) released a circular regarding Direct Market Access (DMA), it widened the scope and allowed the retail investors (An individual investor possessing shares of a given security to be able to access the DMA facility). It is rumored that SEBI is about to release a circular regarding the DMA facility being enabled for retail investors. Experts say that there must be some development regarding the same in SEBI and as they never objected to the same. If the regulator allows Direct Market Access to retail investors, it will completely change the way India’s trading market functions.[1] The truth is that they did not release any circular as of now regarding Direct Market Access.  Let us first have a look at these basic terms and then we shall analyze the impact of this provision.

Securities and Exchange Board of India (SEBI)

The is a regulatory body for securities and commodity markets in India under the jurisdiction of the Ministry of Finance, Government of India. It was established on 12 April 1992 and given Statutory Powers on 30 January 1992 through the SEBI Act, 1992. Securities and Exchange Board of India was first established in 1988 as a non-statutory body for regulating the securities market. It became an autonomous body on 30 January 1992 and was accorded statutory powers with the passing of the SEBI Act 1992 by the Indian Parliament.[2]

Direct Market Access (DMA)

The DMA facility permits the trading members of the exchanges (NSE and BSE are the two main stock exchanges in India)[3] to provide direct trading terminals to their DMA clients, through various connectivity modes. Also, the ‘Broker-Client Agreement’ would be replaced by Simpler ‘Terms and Conditions’ Document[4], owing to the introduction of this facility. A broker is a person who acts as a mediator between a seller and buyer and gets commission once the deal is executed & this facility allows them to offer clients direct access to the exchange trading system.[5]

About the Provision

Investors getting Direct Market Access has already been introduced in many countries around the world. There are two types of investors, retail investors, and institutional investors. In India, direct market access was long back provided to institutional investors. The fact that this facility was for institutional investors and not for retail investors provoked many to blame the Exchanges. This is because they felt that they have been biased and have given the institutional investors an edge over retail investors. This provision shall change the indirect process of the retail investors ordering trade-in exchanges like BSE or NSE through their broker. The DMA facility does not mark an end to brokers! The only difference lies in the broker’s not intervening manually but working through the order management system.[6] Many brokers take undue advantage of being the medium to exchanges and hence end up fooling the investors at times or even making them land in a situation of loss, just to raise their revenue.

Impact

This will surely help the retail investors to:

  • Not rely on the brokers or market-making firms to execute trades, etc.
  • Themselves access the electronic facilities and facilitate their daily securities transactions.
  • Directly place their order in the exchanges, rather than through the broker’s mobile application, broker’s terminal, or website, talk on a call with the broker or by physically meeting the broker.
  • Trade on zero brokerage.
  • Avoid risky situations like the broker revealing the information of a big investor with a success rate.
  • Not let the brokers modify or change the price or maybe cancel the order for trade.
  • Avoid unwanted intervention of brokers.
  • Reduced risk of errors associated with manual order entries.
  • Increased liquidity.
  • Better use of hedging and arbitrage opportunities.[7]

NSE Co-Location Scam

In National India’s Leading Stock Exchange, a scam namely NSE Co-Location Scam took place. NSE was blamed for giving favorable treatment to some brokers because of which they benefited and the other brokers landed in big losses. NSE was defamed to a great extent and the CEO of the exchange also resigned. This scam relates to market manipulation. The exchange enabled few brokers to front-run the rest of the market, possibly breaching the NSE’s purpose of demutualization exchange governance and its robust transparency-based mechanism. This multi-dollar, widespread market fraud came to light when markets’ regulator, the Securities and Exchange Board of India, received the first anonymous complaint through a whistle-blower’s letter in January 2015.[8]

Conclusion

The DMA facility has been hailed by many as they believe that this decision is path-breaking and is much needed. Though there are a few sets of people who believe that the importance of brokers cannot really be neglected in the current trading set-up and hence are against the same.  If the regulator goes ahead with the decision, India’s broking industry’s existence could be threatened. Thus, brokers will object to this provision and this might prove to be a big challenge to this move. This is because it will significantly affect them as it is a major source of their revenue and some small brokers might also fall out of business. The big beneficiaries of this will be BSE ⁠— India’s oldest stock exchange, as well as, NSE- the National Stock exchange. Although there is no clarity till now as to how this will go ahead since technology is available in countries outside India, hence, it should be introduced in India.


References:

[1] India’s broking industry just got the shock of its life – SEBI may soon allow investors to trade directly on the exchanges, Business Insider, https://www.businessinsider.in/stock-market/news/india-stock-brokers-hit-by-sebi-direct-market-access/articleshow/77198064.cms (last visited Oct 29, 2021).

[2] Securities and Exchange Board of India, Wikipedia (2021), https://en.wikipedia.org/wiki/Securities_and_Exchange_Board_of_India.

[3] What is NSE and BSE? – Upstox, (2017), https://upstox.com/learning-center/share-market/what-is-nse-and-bse/ (last visited Oct 29, 2021).

[4] SEBI streamlines Direct Market Access facility for trading, The Economic Times, https://economictimes.indiatimes.com/sebi-streamlines-direct-market-access-facility-for-trading/articleshow/15328461.cms (last visited Oct 29, 2021).

[5] Wikipedia Contributors, Broker Wikipedia (2019), https://en.wikipedia.org/wiki/Broker (last visited Dec 11, 2019).

[6] KS Badri Narayanan, The myth of direct market access to retail investors @businessline, https://www.thehindubusinessline.com/markets/stock-markets/the-myth-of-direct-market-access-to-retail-investors/article32298289.ece (last visited Oct 29, 2021).

[7] B. S. Reporter, Institutional clients allowed direct market access, Business Standard India, April 4, 2008, https://www.business-standard.com/article/markets/institutional-clients-allowed-direct-market-access-108040401053_1.html (last visited Oct 29, 2021).

[8] NSE co-location scam, Wikipedia (2021), https://en.wikipedia.org/wiki/NSE_co-location_scam (last visited Oct 29, 2021).


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