NSE asks brokers to keep a tab on clients trading deep out-of-money options.
Brokers are required to regularly monitor various trading patterns such as pump and dump, circular trading, and front running in order to ensure market integrity.
To combat market abuse, the National Stock Exchange has recently expanded the responsibilities of stock brokers. In a circular issued on June 2nd, the exchange has instructed qualified stock brokers (QSBs) to scrutinize their clients' trading activities and identify any unusual behavior.
On a monthly basis, QSBs are now tasked with closely monitoring the trading activities involving deep out-of-the-money (OTM) contracts, where clients are experiencing losses.
Deep out-of-the-money options are inexpensive because they require a significant movement in the underlying asset for the options to become profitable. Unfortunately, high net worth individuals sometimes misuse these options to artificially create losses through circular trading, aiming to reduce their tax liabilities.
In recent years, deep OTM options have also become a popular and cost-effective method for derivatives traders to minimize their net margin obligations. By taking an offsetting position for a small sum, they can effectively reduce their overall margin requirements.
Moreover, QSBs are obligated to keep a close eye on recurring delivery defaults, clients with disproportionately higher pay-in obligations compared to their declared income, and unrelated clients who share common phone numbers, devices, or email addresses.