Can MTF Be Used for Intraday Trading? Find Out Here

Margin trading has changed the face of stock market participation. With the Margin Trading Facility (MTF), traders borrow money from their brokerage firms to increase their buying power. This facility enables investors to take bigger positions in the market with lesser capital and thereby reap bigger profits. One of the common questions traders pose is whether MTF can be used for intraday trading.

Understanding Margin Trading Facility (MTF)

The Margin Trading Facility (MTF) is a facility provided by brokerage firms whereby traders buy shares by putting in only a part of the value of the transaction, whereas the rest of the amount is funded by the broker. The investor pays margin money, which serves as a security deposit, and the broker pays the rest. MTF allows traders to maximize their investment capital by taking oversized positions in the markets.

Brokerages charge interest on the borrowed amount and the securities traded under the MTF are held in the margin account as collateral until the investor repays the loan. MTF can significantly magnify returns, but with enormous risk, especially when the market moves in the opposite direction.

How Would Margin Money Function in MTF?

Margin money is the least amount that an investor is required to put into avail of the Margin Trading Facility. The margin requirement is determined by the broker's policies, the volatility of the particular stock, and the rules set forth by the regulatory authorities. In India, the Securities and Exchange Board of India (SEBI) has provided some rules on margin requirements to minimize risk and protect their investors.

Is MTF Applicable to Intraday Trading?

While MTF is mainly structured for leveraged delivery trading, it can or cannot be classified as suitable for intraday trading, depending upon the policies of the broker and the regulatory guidance. Let us look at factors concerning the suitability of intraday trading on MTF.

1. Brokerage Policies

Brokerages restrict MTF to delivery-based trades so that an investor must keep holding the stocks beyond one session of trading. Intraday traders mainly have access to margin via standard intraday margin instead of MTF, which is meant for longer positions.

2. Regulatory Restrictions

The SEBI regulations require that MTF facilities be used for delivery-based transactions and not intraday trades. Brokers, therefore, may not allow MTF under intraday trades, as the very foundation of MTF is to finance buying stocks, which investors hold beyond a trading day.

3. Risk Considerations

Intraday trading, on its own, has too much risk, given the nature of market volatility. MTF intraday trading decisions would likely exacerbate that risk, making loss management that much harder. In light of the fact that MTF entails borrowing of funds, this would thereby expose traders to margin calls and liquidation risks when using MTF.

Looking for alternatives for intraday traders if MTF is not the way? Here are a few pointers:

1. Standard Intraday Margin

Brokerage houses provide different intraday margin facilities giving traders larger positions apart from MTF. This normally entails less capital and allows the traders to buy and sell within the same session.

2. Leverage in Derivatives

Futures and options trading provide leverage for traders to take large positions on minimal investment. That is the path of choice for many intraday traders having short-term price movements in their sight.

3. Bracket Orders and Cover Orders

Such orders afford more exposure to traders while ensuring appropriate risk management. A bracket order is a combination of a stop-loss order and a target price from which to exit a trade, while a cover order is protective by placing a stop-loss order automatically.

Conclusion

The margin trading facility (MTF) allows traders to use borrowed funds for purchasing shares. However, MTF is not typically intended for intraday trading. Regulatory authorities and brokers impose restrictions on the use of MTF to delivery-based trade, which means investors should hold stocks for than one trading session.