Actually, according to SEBI rules, proprietary trading means that a broker trades for himself with his own money and not with the money of others. But many brokers are misusing this rule. They are trading with customers’ money in the name of their Prop Account and are giving huge leverage, which is completely illegal.
The biggest feature of this model is attractive leverage. The investor is allowed to trade with a trading capital many times his actual capital. According to market sources, some agents are involved in this entire system who make leverage arrangements for brokers. These agents are neither authorized employees of any broker, nor are they registered with SEBI, yet these agents have become informal channels of “bringing business to brokers”. The most dangerous thing is that these transactions are not recorded on paper. Many times the money is taken into some other bank account, which is not related to the broker business. And in some cases transactions also take place in cash.
Broker’s five fingers in ghee!
At first glance, everyone seems to benefit from this system. If a trader performs well, the broker gets profits, as there is often a provision for profit sharing in such cases. The broker not only gets commission but also gets interest on leverage. The agent gets both commission from the broker and interest difference (Arbitrage) from the trader. For example, if the agent takes a limit at 4 percent interest from the broker and gives the same to the trader at 6 percent, then he gets a profit of 2 percent. The trader also sees the benefit, because he does not need to invest his capital.
To understand in simple language, if a trader deposits Rs 1 crore, then he gets permission to trade up to Rs 7 crore, that too at only 4% annual interest rate. Whereas in India, no retail trader can legally take such leverage from any regulated exchange. According to industry experts, in such informal arrangements, brokers charge 2-6 percent interest for intraday trades and 10-15 percent interest for overnight trades.
Problems start when there is loss
The problem arises when a trader incurs losses or fails to repay the money. In the words of an industry expert – “When there is profit, everyone is a friend, but as soon as there is loss, everyone becomes the enemy.” If one person defaults, the entire chain breaks and the entire risk shifts to the broker. Many times these brokers take funds on bank guarantee, thereby passing the risk on to the banks and lenders.
However, SEBI has taken some strict measures in recent years, such as Direct Payout of Securities and tracking of funds, to reduce such risks. But when a broker defaults, it becomes a long and complicated process for investors to get their money and shares back. This shakes the confidence of investors and creates an atmosphere of fear in the market.
This is how people fall into this trap
Now the question arises that how do people fall into this trap? Actually, these people were implicated through social media, chatting apps, referral networks and by showing false P&L screenshots. They were lured with “insider-like information”, “smart money”, and “high returns” so that they would believe and invest.
SEBI rules clearly state that prop trading accounts are only for the broker’s own capital and not for any public investment. But investigation has revealed that some brokers were using their prop accounts for trading with the money of common investors. According to a market expert, “This model is most seen in Gujarat, Rajasthan, Delhi-NCR, Mumbai metro area, small towns around Jodhpur and Bengaluru.”
Earlier this system was limited only among some special people, but in the last two years it has spread rapidly. A trader said that after the lot size of derivatives contracts increased, many people started raising money from investors in this way. They were shown the dream of earning big money on low margins, and in this process many investors lost their money.
This matter has now become not just of illegal trading but of abuse of investors’ trust. If activities like prop trading continue without control, it will not only hurt the credibility of the market but will also pose a deep threat to the safety of investors.
