A majority of stock brokers have unwound their leveraged positions in the futures and options segment. The total leveraged position (in excess of Rs 1 lakh crore or Rs 1 trillion) contributed heavily to the stock market crash

The unwinding of leveraged positions saw the overall market open interest (OI) on the National Stock Exchange come down by 17 per cent on Monday at Rs 1,05,880 crore (Rs 1,058.8 billion) from Rs 1,26,000 crore (Rs 1,260 billion). The OI further fell 15 per cent on Tuesday to Rs 89,307 crore (Rs 893.07 billion).

Amit Rathi, managing director, Anand Rathi Securities, said: "The weaker hands in the markets are out, as most stock brokers have relentlessly unwound or squared-off the leveraged positions held by retail investors who could not pay the mark-to-market losses."

The initial margins, whether mark-to-market on any cash or futures market deposited by brokers, get recalculated each time there is a revision in the price of the stock.

The leverage in stock futures, which saw several new stocks added in recent times, was also said to be one of the major reasons for the margin pressure.

Margin calls occur when stock exchanges ask brokerages to pay margins when the fall in stock prices erases the existing margins. If the brokerages fail to provide additional margins, the exchanges sell-off the positions.

With a majority of frontline stocks declining in the range of 20 to 30 per cent, the exchanges started debiting margins from brokers' accounts, and even raised the initial margin limit on Monday evening.

This forced brokers to sell positions of clients who did not pay the mark-to-market losses, with the threat of the trading terminal being shut down becoming imminent.

The temporary shut down in trading with the lower circuit being hit on Tuesday had much to do with the mark-to-market issues and margin calls, according to dealers.

"The heavy selling due to margin pressure caused panic and stress on the system. The pain or poison is hopefully now out as most brokers have squared-off huge positions," said Dinesh Thakkar, managing director, Angel Broking.

Drawing a parallel to the May 2006 crash, the day when Reliance Petroleum [Get Quote] shares were listed on the bourses, the total OI in futures was at Rs 33,000 crore (Rs 330 billion).

However, by June 14, when the markets bottomed out, it fell to Rs 10,000 crore (Rs 100 billion), indicating that 70 per cent of the OI was unwound.

According to Thakkar, it is that not all retail investors have sold their positions. "If fact, on Tuesday, we have collected nearly Rs 200 crore (Rs 2 billion) from our retail clients across the country, which indicate that apart from those who could pay the mark-to market losses are holding on to positions and some new positions are being built-up," he said.