Dabba trading, a colloquial term in India, is commonly known as bucket trading in international markets.
How it works?
The dabba operator has a computer that displays the latest quotes from the stock exchange and may even enter transaction data into the computer. However, the trades are not executed on the exchange but only in the records of such operators who are, themselves, the counterparties to the transactions. The computer is the notorious ‘dabba’, a Hindi word for box, and from there flows the use of the terms ‘dabba traders’ and ‘dabba trading’.
It’s illegal
Dabba trading has been banned by the Securities and Exchange Board of India (SEBI) as an investor protection measure. Except for spot transactions, all legal trades are to be routed through stock exchanges. In dabba trading there is no contract document and no issue of bills. There is no rolling settlement for cash trades and settlement cycles for derivatives are unilaterally decided by the operator. When the market moves in favour of the client, excuses are trotted out about why the trade could not be executed whereas losses are invariably recovered. These traders are shady, fly-by-night operators, who disappear when the market moves adversely to their interests. Clients would be well-advised to keep more than arm’s length distance from dabba traders because neither arbitration through stock exchange mechanism nor access to investor protection funds would be available.
