1. Margin Trading and Types of
Orders
Module-I

2. Margins
• After implementation of T+2 rolling
settlement with effect from April 1, 2003 the
stock exchanges now have been advised to
follow the structure given by SEBI.

3. Categorisation of stocks for
imposition of margins
• The risk containment measures for the scrips shall be based on
their volatility and liquidity. The scrips shall be classified into three
groups’ viz., stocks having traded at least 80% (5%) of the days for
previous eighteen months (from July 1, 2001) would constitute
Group I and Group II.
• Out of the scrips identified above, the scrips having mean impact
cost of less than or equal to 1% shall be categorized under Group I
and the scrips where the impact cost is more than 1%, shall be
categorized under Group II.
• The remaining stocks shall be categorized under Group III.

4. Categorisation of stocks for
imposition of margins
• The impact cost shall be calculated at 15th of each month on
a rolling basis considering the order book snapshots of the
previous six months. On the basis of the calculated impact
cost, the scrip shall move from one group to another group
from the 1st of the next month.
• The impact cost shall be the percentage price movement
caused by an order size of Rs.1 lakh from the average of the
best bid and offer price in the order book snapshot. The
impact cost shall be calculated for both, the buy and the sell
side in each order book snapshot. The computation of the
impact cost adopted by the Exchange shall be disseminated
on the website of the Exchange.

5. VaR based margin
• The margin requirements for scrips in the compulsory settlement
mode is determined based on a scientific model, i.e., the Value of
Risk (VaR) model from June 2001.
• VaR is related to the volatility variance of the underlying stock price,
but it is not a measure of volatility. VaR defines the maximum loss a
portfolio can suffer within a time horizon (say a day) at a pre-
specified probability level. For example, if a 99% VaR is specified as
Rs.10, it should be interpreted as in 99 out of 100 days the loss of
the portfolio can suffer will never exceed Rs.10.
• It should be noted that this is not the same thing as VaR is the
maximum possible loss when the markets turn unfavourable. The
maximum potential loss a portfolio can suffer when things turn
unfavourable is the entire value of the portfolio itself.
• To put it in simple terms a 99% VaR will indicate the maximum loss
that portfolio can suffer in 99 per cent of times. Conversely, it is the
minimum loss that a portfolio can suffer in 1% worst cases.

6. VaR based margin
• For the stock in Group I, the VaR will be scrip VaR (3.5 sigma)
computed in a manner specified for the scrip on which stock futures
are traded. On the stocks in Group II where the impact cost is more
than 1%, the VaR margin shall be higher of scrip VaR (3.5 sigma) or
three times the index VaR, and it shall be scaled up by . For the stock
in Group II, the VaR margin would be equal to 5 times the index VaR
and scaled up by.
• For determining the margins for Group II and Group III, the
minimum index VaR would continue to be taken as 5% as at present.
• The volatility estimates for the scrips and the index for the VaR shall
be computed on the price differential of 2 days. The VaR calculated
by an exchange at the end of the previous day would be used for the
purpose of margin calculations for the transactions carried out on
the day.

7. Mark to market margin
• Mark to market margin is computed on the basis of mark to
market loss of a member. Mark to market loss is the national
loss which is the difference between the current market price
and the contract price in respect of the outstanding trades.
• Mark to market margin is calculated by marking each
transaction in a scrip to the closing price of the scrip at the
end of trading. In case the security has not been traded on a
particular day, the latest available closing price, at the NSE is
considered as the closing price.

8. Mark to market margin
• In the event of the net outstanding position of a member in
any security being nil, the difference between the buy and sell
values would be considered as national loss for the purpose
of calculating the mark to market merging payable.
• MTM profit/loss across different securities within the same
settlement is set off to determine the MTM loss for a
settlement. Such MTM losses for settlements are computed
at client level.

9. Margins based on turnover and exposure
limits (initial margins)
• Intra-day turnover limit Members are subject to intra-day
trading limits, intra-day gross turnover (buy + sell) of the
member should not exceed twenty five (25) times the base
capital (cash deposit and other deposits in the form of
securities or base guarantees with NSCCL and NSE).
• Members violating the intra-day gross turnover limit at any
time on any trading are not be permitted to trade forthwith.
Members’ trading facility is restored from the next trading
day with a reduced intra-day turnover limit of 20 times the
base capital till additional deposits (additional base capital)
are deposited with NSCCL.

10. Margins based on turnover and
exposure limits (initial margins)
• Members are given a maximum of 15 days time from the date of
the violation to bring in the additional capital, upon members
failing to deposit the additional capital within the stipulated time,
the record turnover limit of 20 times the base capital would be
applicable for a period of one month from the last date for
providing the margin deposits.
• Upon the member violating the reduced intra-day turnover limit,
the above-mentioned provisions apply and the intra-day turnover
limit bill be further reduced to 15 times. Upon subsequent
violations, the intra-day turnover limit will be further reduced from
15 times to 10 times and then from 10 times to 5 times the base
capital. Members are not permitted to trade if any subsequent
violation occurs till the required additional deposit is brought in.

11. Gross exposure limits
• Members are also subject to gross exposure limits.
Gross exposure for a member, across all securities in
rolling settlements, is computed as absolute (buy
value – sell value), i.e., ignoring +ve and –ve signs,
across all open settlements.
• Open settlements would be all those settlements for
which trading has commenced and for which
settlement pay is not yet completed. The total gross
exposure for a member on any given day would be
the sum total of the gross exposure computed
across all the securities in which a member has an
open position.

12. Gross exposure limits
• Gross exposure limit would be:
• Total base capital Gross exposure limit
• Upto Rs.1 crore 8.5 times the total base
capital
• > Rs.1 Crore 8.5 crore + 10 times the
total base capital in excess
of Rs.1 crore.

13. Gross exposure limits
• The total base capital being the base
minimum capital (cash deposit and security
deposit) and additional deposits is not used
towards margins in the nature of securities,
base guarantee, for, or cash with NSCCL and
NSE.

14. Violation charges
• A penalty of Rs.5000 is levied for each violation of gross exposure
limit and intra-day turnover limits, which shall be paid by next day.
The penalty is debited to the clearing account of the member; non-
payment of penalty in time will attract penal interest of 15 basis
points per day till the date of payment.
• In case of second and subsequent violation during the day the
penalty will be in multiples of Rs.5000 for each instance (for example
in case of second violation for the day the penalty levied will be
Rs.10,000, Rs.15,000 for third instance and so on).
• In respect of violation of stipulated limits on more than one occasion
on the same day, each violation would be treated as a separate
instance for purpose of calculation of penalty.
• The penalty as indicated above would be charged to the members
irrespective of whether the member brings in additional capital
subsequently.

15. Types of orders
• Before comparing alternative trading practices
and competing security markets, it is helpful
to begin with an overview of the types of
trades an investor might wish to have
executed in these markets.
• Broadly there are two types of orders: market
orders and orders contingent on price.

16. Market Orders
• Market orders are buying or selling orders that are to be
executed immediately at current market prices.
• For example, our investor might call her broker and ask for
the market price of IBM. The broker might report back that
the best bid price is $90 and the best ask price is $90.05,
meaning that the investor would need to pay $90.05 to
purchase a share, and could receive $90 a share if she wished
to sell some of her own holdings of IBM.
• The bid-ask spread in this case is $.05. So an order to buy 100
shares “at market” would result in purchase at $90.05, and an
order to “sell market” would be executed at $90.

17. Market Orders
• This simple scenario is subject to a few potential complications.
First, the posted price quotes actually represent commitments to
trade up to a specified number of shares. If the market order is for
more than this number of shares, the order may be filled at
multiple prices.
• For example, if the asked price is good for orders up to 1,000
shares, and the investor wishes to purchase 1,500 shares, it may be
necessary to pay a slightly higher price for the last 500 shares.
• Second, another trader may beat our investor to the quote,
meaning that her order would then be executed at a worse price.
Finally, the best price quote may change before her order arrives,
again causing execution at a price different from the one at the
moment of the order.

18. Price-Contingent Orders
• Investors also may place orders specifying prices at
which they are willing to buy or sell a security. A limit
buy order may instruct the broker to buy some
number of shares if and when IBM may be obtained
at or below a stipulated price.
• Conversely, a limit sell instructs the broker to sell if
and when the stock price rises above a specified
limit. A collection of limit orders waiting to be
executed is called a limit order book.

19. Stop orders
• Stop orders are similar to limit orders in that the trade is not
to be executed unless the stock hits a price limit.
• For stop-loss orders, the stock is to be sold if its price falls
below a stipulated level. As the nave suggests, the order lets
the stock be sold to stop further losses from accumulating.
• Similarly, stop-buy orders specify that a stock should be
bought when its price rises above a limit. These trades often
accompany short sales (sales of securities you don’t own but
have borrowed from your broker) and are used to limit
potential losses from the short position.

20. Figure 1.1 organizes these types of
trades in a convenient matrix.
Condition
Price below the Limit Price above the Limit
Action Buy Limit-Buy Order Stop-Buy Order
Sell
Stop-Loss Order Limit-Sell Order