Thread by @Nithin0dha

A lot has been said about what we should have done on 24th Feb 2021 when NSE halted trading. Of course, with hindsight, it is easy now to suggest. But at 3 PM on the 24th Feb, the best option was to square off all NSE intraday positions on BSE.

Here’s why 1/n

If you aren’t aware of what happened on the 24th, check this post
zerodha.com/z-connect/zero… 2/n

Intraday (MIS/CO) trades are taken with margin, as low as 5% of value. Pre-Condition: positions will be force closed before close as they carry higher risk. Until 3.20 pm, we didn't know timings would be extended. So sticking to, normal square-off timing was right thing to do 2/n

With just a 5% margin, a stock moving against the customer can mean significant losses. The chance of large moves is much higher overnight than intraday. Square off was the right thing to do to ensure customers are not exposed to large overnight price moves. 3/n

The risk is way higher if those leveraged positions are short as they carry the additional risk of short delivery & auction. Auctions can happen at as much as 20% or more away from the current market price. So it was a no-brainer, we couldn’t expose clients to that risk. 4/n

At around 2.40pm we announced that we will square off all NSE intraday positions on BSE. Many concerned customers thanked us. We were also applauded on social media. Soon after we announced, almost all other brokers also announced that they will be taking similar action. 5/n

So at around the usual time that we square off intraday positions, we did the same on the 24th. Just that it was on BSE and not NSE. Even though the trading activity on BSE was 10X, the square off of positions on BSE had a much higher impact cost than it is normally on NSE. 6/n

While logically all trading activity should have shifted to NSE when it was halted, and there shouldn't have been an impact cost. It now seems like there were some clearing corporation issues due to which volumes didn't really go up by as much on BSE. 7/n

Allegations that somehow we were counterparty to these square off trades which were executed at prices away from market prices are just fiction. All order matching happens on the exchange and we can’t be the counterparty to any client trades. 8/n

We mostly have the same number of clients who have buy or sell positions on an intraday basis. Markets bounced back after reopening at 3.45pm. Customers who were long probably felt that they missed out on profits. Btw, with this logic, those who were short avoided losses. 9/n

As brokers, our business isn’t to predict the direction of the market. Given all the information available, it is about making a decision that is in the best interest of the customers. And at 3pm not knowing if market timings would be extended, squaring off was the right one10/n

If we hadn’t squared off and the markets weren't extended, overall, all our customers together would have lost significantly more than the loss due to the impact cost of squaring off on BSE. 11/n

Can this happen again?
Unfortunately, yes it can. In a tech-first world, there will be downtimes - be it Google, Amazon, Exchanges, Brokers, or anyone else.
But we are working on interop on the trading platform. Where you can buy on one exchange and sell on another yourself 12/n

and Minimum intraday margins under new peak margin regulation are going up to 10% from March 1st & 20% from Sep 1st. With lesser risk, the pressure to square off if such a situation were to arise again will be much lesser. n/n