Trading member
Also written TM · Trading Member (TM) · Trading member (stock broker)
A member of a stock exchange who trades on behalf of clients or on his own account, under a trading member ID shared by all his registered users — and who must clear through a clearing member.
In plain language
A trading member is what most people call "the broker". It is a member of the stock exchange, and it can place trades either for its clients or on its own account (proprietary trading).
The exchange gives each trading member a trading member ID. Under that ID the member can have more than one user — the number of users allowed is decided by the exchange from time to time, and each user must be registered with the exchange and gets a unique user ID. The member ID is common to all its users, so it acts as the reference for every one of them. The trading member is responsible for maintaining adequate control over whoever has access to those user IDs.
A trading member trades. Whether it also clears and settles depends on which clearing membership it holds, if any — that is where self-clearing members, trading-cum-clearing members and professional clearing members come in.
How it works
Inside the firm, the trading software lets the member set a user hierarchy (Chapter 6, section 6.1):
| Level | Can do |
|---|---|
| Corporate Manager | Everything, for all branches and dealers; the only level that can define exposure limits for branches |
| Branch Manager | Order and trade activity for all dealers under that branch |
| Dealer | Only his own orders and trades |
Toward the client, the trading member is responsible for KYC, the client-broker agreement, timely order execution, collecting adequate margins, keeping client money in a separate bank account, timely pay-in and pay-out, contract notes, complaints, periodic statements and a unique client code. Every order must be flagged Pro (proprietary) or Cli (client).
Toward the regulator (Chapter 8):
- SEBI has not specified any net worth requirement for a trading member; exchanges decide it.
- Every trading member must appoint at least two approved users who have passed the SEBI-approved certification. Only approved users may operate the derivatives terminal.
- Trade confirmation slips and exercise notices must be kept for 5 years; members are inspected by the exchange at least once a year.
- A default in the derivatives segment is a default in all segments of that exchange and on all exchanges where he is a member.
Position limits (Chapter 7, section 7.7): in index futures and index options, higher of Rs 7,500 crore or 15% of total open interest; in individual securities, 20% of the MWPL per exchange.
A worked example
How a clearing member adds up its trading members' positions — the workbook's example from Chapter 7, section 7.2.
Clearing member A clears for two trading members, PQR and XYZ, in the Nifty May contract. Proprietary positions are netted; each client is netted separately; then clients are not netted against each other.
| TM | Proprietary buy / sell / net | Client 1 net | Client 2 net | TM long | TM short |
|---|---|---|---|---|---|
| PQR | 5,000 / 3,000 / +2,000 | +1,000 | +2,000 | 5,000 | 0 |
| XYZ | 1,000 / 2,000 / −1,000 | +1,000 | −1,000 | 1,000 | 2,000 |
Working XYZ:
Long = client 1 net long = 1,000
Short = proprietary net short 1,000 + client 2 net short 1,000 = 2,000
Clearing member A's open position:
Long = 5,000 + 1,000 = 6,000
Short = 0 + 2,000 = 2,000
A's obligation is long 6,000 and short 2,000 — not a net 4,000 — because one client's long cannot offset another client's short.
Why NISM asks about it
Chapter 6, section 6.1 (Trading Mechanism), defines the trading member and the other entities, the corporate hierarchy and the client-broker responsibilities. Chapter 7 carries the clearing arithmetic and the trading-member position limits. Chapter 8, sections 8.3 to 8.5, carries the approved-user, record-keeping, inspection, default and net worth rules. Questions on "who sets the net worth for a TM" and "how many approved users" are standard.
Common exam traps
- SEBI sets net worth for clearing members, not for trading members. For TMs and limited trading members, the exchanges decide.
- At least two approved users, and only approved users may operate the terminal.
- Only the Corporate Manager can set exposure limits for branches.
- A trading member is not automatically a clearing member. It may clear its own trades only if it is a self-clearing member, or clear others' if it is a trading-cum-clearing member.
- Client positions are grossed, proprietary positions are netted. A TM with one client long and another short has both a long and a short open position.
- A PCM is not a trading member of the exchange.
Where this is taught
- Series IV · Chapter 6: Trading Mechanism in Exchange Traded IRDintroduced here
- Series XVI · Chapter 6: Trading Mechanismintroduced here
- Series I · Chapter 6: Trading Mechanism in Exchange Traded Currency Derivativesintroduced here
- Series VIII · Chapter 6: Trading Mechanismintroduced here
- Series VIII · Chapter 8: Legal and Regulatory Environment
Related terms
- Market Wide Position LimitThe ceiling on total open interest in a stock's futures and options across exchanges — 20% of non-promoter shares. Above 95% no fresh positions are allowed until it falls to 80%.
- Professional Clearing MemberA clearing member — typically a bank or custodian — who clears and settles trades for other trading members and institutional clients but is not itself a trading member of the exchange.
- Approved userAn individual, certified under a SEBI-approved programme, whom a trading member appoints to operate its derivatives trading terminal — the only person actually allowed to key in orders on it.
- Self-clearing memberA trading member who is also a clearing member, but may clear and settle only his own proprietary trades and his own clients' trades — never the trades of other trading members.
- Trading cum clearing memberA clearing member who is also a trading member of the exchange, and may clear and settle its own trades, its clients' trades, and the trades of other trading members and custodial participants.
- Position limitsThe maximum open positions the whole market and each trading member or client may hold in interest rate derivatives — set as the higher of a percentage of open interest or a rupee amount, and always specified in lots.
- Screen Based Trading SystemThe nation-wide automated trading platform on which commodity derivatives are traded, matching orders anonymously on strict price-time priority rather than by negotiation.
- Early warning signalsIndicators that stock exchanges, depositories and clearing corporations monitor to catch a stock broker's deteriorating finances or diversion of client securities early, triggering joint preventive action.
- Stock exchange bye-lawsThe rules each stock exchange frames for its own trading members — admission, listing, fees, trading and settlement, members' rights, arbitration — approved by SEBI and consistent with the SCRA, SCRR and SEBI Act.
- Integration of broking activitiesSEBI's September 2017 circular permitting equity broking and commodity derivatives broking under a single entity — the intermediary-level step that preceded single-exchange trading from 1 October 2018.
- Kill switchA pre-trade facility that lets a trading member cancel every one of its outstanding orders with a single command — the emergency brake for a malfunctioning terminal or algorithm.
- Authorised personTwo different entities share this name: under SEBI, an agent appointed by a stock broker to give clients access to the trading platform; under FEMA, a dealer authorised by RBI to deal in foreign exchange.
- Custodial participantA client allowed to trade through several trading members while clearing and settling through a single clearing member, identified by a unique CP code; its CM must confirm the trades.
- RBI-SEBI Standing Technical CommitteeThe joint committee constituted after an RBI-SEBI meeting on 28 February 2008 to coordinate the regulators on exchange-traded currency and interest rate futures; its May 2008 report launched currency futures.
- IRRA platformInvestor Risk Reduction Access — a joint exchange platform that lets individual investors square off open positions and cancel pending orders when their trading member's services are disrupted by a technical glitch.
- Peak marginThe highest intraday margin requirement of a client, measured from at least four clearing corporation snapshots a day; brokers are penalised if collected margin falls short of it.
- Black box algoAn algorithmic trading strategy whose logic is not disclosed to, or replicable by, the user. Under SEBI's retail algo framework its provider must register as a Research Analyst.
- Investors Grievance DivisionThe department of a stock exchange that investors approach to resolve complaints against its trading members, working with the member and the complainant before any escalation to SEBI SCORES.
- Corporate ManagerThe highest user level on a trading firm's F&O terminal — the only user who can set branch exposure limits and see every branch and dealer's orders, trades and reports.
- Limited trading memberA special category of trading member, offered by some exchanges, who is not a member of the cash market segment and whose net worth requirement is decided by the exchange, not SEBI.