Dabba Trading Meaning, Software, punishment, app, brokers in Mumbai & Surat
We often read about Dabba trading, not being permitted by the regulators. Many do not know the mechanics and the risk associated with it.
Dabba Trading” also known as “Bucketing” is the process used by brokers to route their client’s trades outside the Stock/Commodity exchange. In such trading, the broker either does not execute any trade or matches and execute trades on its own terminal. “Dabba” has its origin in the developed markets where a system called bucketing prevails.
Bucketing is an illegal practice where a stockbroker executes a customer’s trade without taking it to stock exchange with the hope of making some gains at a future date. essentially, bucketing involves the confirmation of an order from a client without actually executing the order on the client’s behalf.
This is how a usual share purchase in the share market looked like: An investor wanting to buy shares for, say ₹ 100, would instruct his broker to execute the purchase on his behalf. The broker would either take the amount of ₹ 100 upfront from the investor or, if he has sufficient margin money from the investor with him, would purchase shares for ₹ 100 on the investor’s behalf from the exchange by paying that amount himself. Each trade involved some cost to the investor; a percentage of the transaction amount had to be paid as the broker fee, exchange fee, Sebi turnover fee, stamp duty and, from October 2004 onwards, a percentage of the transaction amount would go to the income tax department as Securities Transaction Tax too.
As it stood then, for a transaction amount of ₹ 100, the total cost would amount to about ₹ 101, the fees and other payments amounting to about 1 per cent of the transaction amount. This would be paid by the investor to his broker (even if the amount of ₹ 100 was not paid upfront, some amount had to be kept by the investor with the broker as margin money).
A similar cost would be incurred when the investor decided to sell his shares. The sale/purchase transactions would be recorded on a system, with proper trails and paper documentation. Obviously, settlement of a trade in the stock market is guaranteed, and even if one of the parties defaults, the buyer would invariably get his shares and the seller his money.
The Dabba trader’s way
But there were certain brokers and investors with misplaced adventurism who preferred to trade the Dabba trading way. As the name suggests, Dabba trading is nothing but hoax trading or fake transactions. Continuing from the above example, if an investor wanted to bet on shares for ₹ 100, in Dabba trading the trades would not be formally executed at all! The broker would, on behalf of his customer, execute the trade-off the market.
This meant the investor would simply bet on that scrip at a particular price point. If the price point rose, the customer would gain and get the difference between the quoted price and the price point, and if the price fell, he would lose and shell out the difference.
Therefore, if the price of the scrip fell to ₹ 90 (on a pre-decided date, the reference price being ₹ 100), the broker or investor would settle the position by paying or receiving ₹ 10. All these transactions were done in cash. There was no actual share purchase or sale and no actual payment to the exchanges (either of the transaction amount or the margin money). In fact, the broker/investor did not even need ₹ 100 with them to bet on trades. An investor could very well have ₹ 10 or nothing in his pocket, and still, bet on shares for ₹ 100.
The anticipation is that the broker will be able to realize enough profit to offset the difference to the client at a future date, either due to executing the order at a later date or through profits generated on other transactions. The broking house that engages in this activity is called bucket shops. Dabba trading operates essentially like the American bucket shops of the 1920s that existed before the Securities and Exchange Commission (SEC) was set up.
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 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 a derivative segment for a period, not necessarily prescribed by the stock exchange. The cash trade is not settled on a 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 the client’s favour, whereas losses are extracted regularly from the clients.
This presents before us the picture of an outlaw practising amidst us, the organized price discovery mechanism of stock exchanges to run an illegal business while maintaining the façade 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 have conducted several raids in the past and alerted citizens. Media has also played a 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 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-broker’s 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 importantly, 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 the 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.
Concerned over growing illegal futures trade in commodities, the sector regulator Forward Markets Commission (FMC) has started holding training programs for police forces across states where such trading has proliferated.
According to the industry estimates, the size of illegal futures trade (also known as ‘Dabba trading’) in commodities is expected to be up to Rs 3,00,000 crore a day in the country. In India, Gujarat and Uttar Pradesh are two main centres for Dabba trade. As if Dabba trading in stocks and commodities was not enough, punters in Rajkot and other parts of Saurashtra have even started foreign currency trading. Foreign currencies such as the Euro, Pound, Yen and Australian dollar have become the hot favourites of this market which has a daily turnover of Rs 100 crore.
In a recent incident, a Dabba trade racket in menthe oil was busted at Chandausi in Uttar Pradesh. In fact, the unofficial Dabba trade-in Chandausi is believed to have driven away mentha volumes, by as much as 80% since last year, from two of the online national exchanges — MCX and NCDEX.
Trades have also been reported from other mentha growing areas in UP like Sambhal and Rampur. Mentha oil has always been a speculators’ delight and in the past, even some big stock market players have played the Futures on the official exchanges. Despite the risks, Dabba trades are generating volumes of three to four times the combined turnover in both the exchanges.
The impact of Dabba trading
This Dabba trading was akin to a full-fledged parallel black economy of the stock market. Lakhs of crores of rupees were being betted, but hardly any of it was happening through the exchanges, and many authorities (the exchanges, Sebi, the revenue department etc.) were being deprived of thousands of crores of rupees in revenue. Also, exchanges were deprived of the share purchase prices or margin safety. In addition, if the brokers/investors made any gains, they would not be paying capital gains tax on their Dabba trades, causing a further loss of revenue to the country’s exchequer.
Second, this Dabba trading was akin to pure gambling, which is prohibited in India. Brokers and investors often make trade bets, risking crores of rupees without having the adequate amount with them for backing their bets, as anyway the bets were off-market and there were no margins in reserve. So even if a bet was won, the losing broker or investor from whom the money was to be collected would vanish. In the end, investors’ money would be at big risk, and there was no exchange guarantee and margin safety to protect them.
The risk was even more in cases where brokers indulged in Dabba trades without informing their clients. Some Dabba traders would, however, hedge their net positions daily through official derivatives trades, but those were exceptions rather than the rule. Since Dabba trading was becoming widespread, their volumes were growing and many gullible investors were getting drawn in. It had the propensity to become a contagion, which could eventually spread to the capital market in many ways. Large failures of Dabba trades would affect sentiments in the capital market, and if they happened around the dates of derivatives settlement, it was bound to impact the market and become a low-lying possibility of a market-wide failure later.
After all, these transactions were ostensibly done as stock exchange transactions. And how could the regulator permit this illegal activity? Generally, Dabba trading happened in centres where the smaller regional stock exchanges (RSEs) were present. RSE governing boards were not strictly monitoring the norms of trading and surveillance. Brokers in their zones often constituted a kind of financial mafia whom the governing boards had to obey. They had to ignore the illegalities committed right in or outside the stock exchange premises.
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