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livemint.com / 1 month ago
livemint.com / 1 month ago
Margin trading is growing fast. The risk is growing faster.
₹1.20 trillion even as the markets turned volatile, according to a February Care Edge report. A meaningful share of these borrowed positions is concentrated in relatively illiquid stocks, where MTF outstanding is several times the daily trading volume.This is not merely a story about rising leverage. It is a window into a larger regulatory blind spot.Financial regulation is designed to protect individuals.
Each investor gets warnings. Each borrower faces margin requirements. These rules are aimed at one person at a time.
The underlying assumption is simple: if each individual is adequately protected, the system is safe.The assumption is wrong.Market crises don’t happen because individuals take too much risk. They happen because many individuals take the same risk at the same time. When margin calls arrive together, individually rational decisions aggregate into a collective catastrophe.Each borrower sells to meet the requirement — exactly what they should do.
But when thousands do it simultaneously, the system breaks down.Consider a simple example. Imagine 10,000 investors, each holding ₹10 lakh in a small-cap stock using MTF. The market falls 10%.
Brokers issue margin calls. Each investor sells to meet the requirement.But the stock’s daily trading volume is ₹50 crore, while the collective selling pressure is ₹1,000 crore.Prices collapse. The circuit breaker hits.
The exit door locks.Every investor followed the rules. The system failed anyway.For those with a long enough memory, this is exactly what made the 2008 crisis worse with every passing day. Lehman Brothers collapsed.
Every bank holding mortgage-backed securities tried to sell simultaneously. No bid appeared. Prices froze, then crashed.The mechanism was different
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