As a part of the investor education, it is important to know the good as well as bad practices prevailing in the market. We often read about dabba trading, not being
permitted by the regulators. Many do not know the nmechanics, and also the risk associated with it, till now. Dabba means box and a dabba operator, in stock market
terminology is the one who indulges in dabba trading. His office is like any other brokers office having terminals linked to the stock exchange showing market rates of stocks. However, the difference is that the investors trades do not get executed on the stock
exchange system but in the dabba operators books only. A dabba operator acts as a principal to all the trades and not as an agent of the client. He is a counter party to the
trades, whereas, he should be the Clearing Corporation who guarantees trades on the BOLT/NEAT system. This kind of operation, where trade is kept within the books of
the operator is called dabba in the popular market terms.
A Dabba operator flouts rules and regulations relating to Client Protection, which includes registrations, margins, transaction, execution and settlements. Not only he evades the Income tax regulations, which prohibit dealings in cash, but also service tax rules and many other mandatory requirements.
It may be learnt that the Securities Contract Regulation Act permits securities transactions only through stock exchanges unless the settlement of the trade is done on
a spot basis i.e. the receipt and delivery of shares happen within 24 hours of the trade. But a dabba operator allows the client to carry forward the trade, be it in cash or in derivative segment for a period, not necessarily prescribed by the stock exchange. The cash trade is not settled on rolling basis and the derivative trade may not have a month-end settlement cycle.
In dabba trading, most of the times, neither written contracts are made, nor the bills are issued .The settlement cycles are authorized by the dabba operator, himself. There is no daily mark to market settlement if the trade is in clients favour, whereas losses are extracted regularly from the clients.
This presents before us the picture of an outlaw practicing amidst us, the organized price discovery mechanism of stock exchanges to run an illegal business, while maintaining the faade of a stock market broker. It is a criminal offence, not much different from smuggling or black marketing. As a result, frequent raids are conducted on dabba trading operators in which their computers and records are seized. Those working in his office are also taken in the custody just like drunkards found in the illegal toddy
shop. The Gujarat police has conducted several raids in the past and alerted citizens. Media has also played its role in reducing the menace of dabba trading. Some dabba traders hedge their positions in the market by partly executing the trade in the market,
maybe in their own proprietary accounts or some benami names. Dabba traders disappear when the market goes against them, resulting in huge losses for their clients. The brokers who permit such activity in their branches or even sub-brokers offices are the affected parties. Stock exchanges take complaints against dabba trading very seriously and enforce strict penalties. Even suspension is levied, if stock exchange inspections confirm the complaint.
As Sensex jumps, resulting in the spurt in trading activity, dabba traders bounce back in the business. Hence constant vigilance is required. Most important, people should not patronize such traders.
The clients patronizing such dabba traders may find some short-term benefits here. They do not follow Know Your Client norms; fill cumbersome forms, sign long agreements and requirements like PAN card. Margins are bypassed and leveraging is freely available. Unaccounted cash is used for making payments rather than making payment by cheque. It must be understood that dabba traders are fair weather
friends. They seldom honour their commitments, particularly when market is against them. Dabba shops close overnight, with traders disappearing from the locality. They go to the extent of employing goons for the recovery of losses. In such a case, neither Stock Exchange Arbitration is available to the investor nor there is any access to customer protection funds. The Security blanket provided by the Security Market
Regulations is also not there.
India is a country where the respect for law is scant. Our holy epic Ramayana prophesies compliance of the law. Sita was kidnapped by Ravan because she did not follow the instructions of Lord Rama and crossed the Line. Inspite of our rich cultural past, we demonstrate noncompliance to our children, early in their lives. We notice
parents as well as teachers breaking traffic signals just outside the school campus, as there is no penalty levied. Such small instances showing indiscipline grow leading
to casual approach towards law.
Globally, Indian Securities Markets have earned a Place of Pride. Indian investors have gained a lot from the rising indices. Let us be alert citizens and report all instances of dabba in our locality.
Remember healthy market is the foundation of wealth creation.
Buying gold on the stock exchange?? Impossible, it is a commodity; we have to go to the commodity market. Well, buying gold on the stock exchange is now possible with the eminent introduction of Exchange Traded Fund that will invest in Gold only. ccumulation of gold for a marriage in the family is a popular Indian custom. Instead of physical acquisition of gold or demating the same we go a step forward and buy shares that
represent gold. Let us first understand the concept of Exchange Traded Fund (ETF) then understand about the advantages of buying gold ETF.
EFT is defined as a security that tracks an index, a commodity or a basket of assets like an index fund but trades like a stock on an exchange and experiences price changes throughout the day as it is bought and sold. ETF were first launched in 1993 in United States. Their popularity as a structured product has grown immensely because of the benefits it provides to investors and traders. The issuance of EFT is just like a
primary market IPO or a mutual Fund NFO. Shares are issued by the Fund manager and listed on the exchanges. Investors can buy and sell these shares from the secondary market through their brokers. ETF are often called as index shares, are a hybrid of index mutual funds and stocks. Some popular funds are
ETF nameETF SymbolUnderlying Asset which it tracks
StreetTracks Gold SharesGLDGold
NASDAQ ETFQQQQNASDAQ
SpiderSPYS&P 500
The advantages of a Traded fund shares are :
Tradable and diversifiable: ETF offer a unique advantage as they are diversifiable like mutual funds and also can be traded like stocks. Mutual funds cannot be traded each day like a stock.
Low cost: ETF like an Index fund does not require active fund managed and is therefore cheaper as passively managed.
Transparency: ETF is a very transparent instrument, as everyone knows the underlying asset.
Makes multiple trading strategies possible: Arbitrage opportunities between cash and futures market can be availed at low cost. Trading strategies can be applied with stop loss orders.
The disadvantages are:
Broker and commission costs: ETF are traded through brokers and hence every time brokerage has to be paid which becomes costly affair if regular trades are done.
Premiums and discounts: An ETF might trade at a discount to the underlying shares. This means that although the shares might be doing very well on the bourses, yet the ETF might be traded at less than the market value of these stocks
There are different types of ETF unlike close-ended funds can create or cancel units as investors enter or leave the fund. The size of the ETF, rather than the price, will fluctuate based on the demand and supply for the ETF. There are several ETF launched till date
they can be broadly categorized as follows:
Global ETF: There are ETFs tracking indices beyond the domestic markets. Ex specific regional funds that track fast growing markets in China and Korea.
Fixed Income ETF: ETF tracking fixed income products. ETF in this case may declare and pay dividends.
Commodity ETF: ETF that track commodity or commodity indices take advantage from the gains in the commodity market.
Currency ETF: ETF tracking currency or currencies. Ex ETF- Euro Currency Trust
(FXE) was introduced in Dec 2005 which trades on the NYSE. Hence investors can
take exposure in Euro through this fund.
It is also important to understand the difference between a Mutual Fund and ETF :
Trading in ETF takes place on the stock exchanges during trading hours. The Mutual fund units are however purchased from the Mutual Fund at NAV at the end of the day. The expenses are low in an ETF since there is no active fund management involved as in case of mutual funds. The costs in mutual funds are higher in short term since they are subject to load fees, annual management fees, exit fees etc. These are intended to discourage frequent trading. Dividends are rarely made in EFT whereas there are frequent dividends made depending upon the stocks the mutual fund is holding. As per Indian tax laws redemption amount received from mutual fund units are not subject to tax, however in case of EFT if representing gold, which is a commodity and not stock there would be tax payment in event of appreciation. ETF are regulated by the same authority, which regulates mutual funds. In the Indian context SEBI is the regulator.
ETF is not a new concept in India. There have been two ETFs launched in India one is based on Sensex which was called Spice and another was launched with Nifty as
an underlying asset, it was gold Nifty Bees. However both these instruments failed to attract the attention of investors. These instruments allowed the investors to buy index in the form of shares. The investors apparently preferred to buy shares included in the index directly by buying index baskets or purchased index in derivatives
markets.
Falling interest rates has forced Indian household to look at other classes of assets to hedge their portfolios as well as improve the yield on their basket of assets. Given
the fascination for gold among Indians the current launching of gold-based EFT has obvious advantages. Gold can be bought like a share on stock exchanges; storage will be done by the Fund manager, no security risk, no impurity risk, and no cost of making charges. Costs will be low and same channel of trading and delivery like shares will be used. Innovation of products in Indian markets is welcome. Time will tell whether despite obvious advantages Indian savers will continue to buy gold from jewelers and banks or from the stock exchanges.