SEBI set to curb misuse of proprietary trading terminals

Brokers have been renting out terminals to professional traders for a monthly fee or commission, allowing them to bypass the client margin pay-out.
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HEMANSHI KAMANI

The Securities and Exchange Board of India (SEBI) may soon roll out new rules to curb the misuse of proprietary trading terminals, amid concerns that some brokers are renting them out to traders to bypass margin requirements, according to sources.

The brokers industry standards forum (ISF) have finalised and cleared the rules after extensive discussions with the industry and stakeholders. The regulator is in the process of drafting the proposals and is expected to come out with a consultation paper soon, sources said.

Proprietary trading is used by a broker for own investment or trading, with margins adjusted against funds already deposited with the stock exchanges, rather than requiring an upfront margin payment. While intended to manage internal risk, this facility has been misused by some brokers to offer “prop terminal rental” services.

To plug the loophole, each proprietary trading terminal will be mandated to register with the exchanges against a unique 12-digit media access control (MAC) address and a static internet protocol (IP) address. These identifiers assigned to the computer’s network and the internet provider will help pin down the exact physical location of every trading workstation, an exchange source said.

Any deviation —such as moving the terminal to an unregistered location—will automatically trigger a surveillance query. If a terminal’s MAC or IP address changes without prior approval, exchanges will launch investigations to determine whether the change reflects unauthorised rentals or other violations, the source said.

An email sent to SEBI seeking comments did not elicit a response.

Rental Schemes

Brokers have been renting out terminals to professional traders for a monthly fee or commission, allowing them to bypass the client margin pay-out as these trades use the broker’s funds deposited with the exchanges as net-worth requirements.

In such cases, the client’s trade is classified as a ‘proprietary trade’ by the broker instead of a ‘client trade’ to pocket the upfront margin that would otherwise have been collected. This allows the clients to avoid paying indirect taxes, margin cost, and also take higher exposures than permitted by regulations.

“There are many cases of prop trading terminals being rented out and prop trades being settled separately with the brokers, so that the customer doesn’t have to pay client margins and the trades fall outside the regulated ecosystem,” an industry source said.

SEBI has noticed many such cases and is not happy about the circumvention as this puts investor redressal outside of the markets regulator’s purview. “If something goes wrong, the investor won’t have the adequate documentation to substantiate a complaint or any redressal,” the source said.

There have been several instances of prop trading terminals being located far away from the registered location with exchanges, especially since SEBI tightened the margin rules. In parallel, the income tax department has been sending notices to several brokers for explanations regarding huge transactions in brokers’ prop books from such unauthorised trades.

Published on May 18, 2025