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Friday, December 21, 2007

Watching markets work - IFCI

There was an announcement on 19th that the IFCI control transaction would not go through. The CMIE website shows this at 6:11 PM, so this would be after the market closed at 3:30. The stock price graph from Friday (14th) to Thursday (20th), from Yahoo Finance, is fascinating (click on it to see it more clearly). At the close of business on 17th, IFCI and Nifty were together. A gap showed up on 18th morning and widened slightly by 19th. On 20th morning, there was a massive gap and the opening price was over 30% below that found on Friday.

But then, IFCI is defunct. The only reason to buy IFCI is to get a license to be an Indian financial firm - a reflection of the entry barriers in Indian finance. The 20th closing price (Rs.76.75) is still a hefty P/E of 7.89 and a P/B of 2.81.

I often meet people who are repelled by sharp price fluctuations. Episodes like this are a vivid demonstration of markets in action, and of the importance of sharp movements of the price when there is a sharp change in the situation. The valuation of IFCI on Friday was conditional on the sense that a management transformation was around the corner. On Tuesday and Wednesday it was clear there were problems, and on Wednesday evening the announcement came out that the deal was not going through as envisaged. It is an efficient market that responds swiftly and clearly.

Look closely at the intra-day chart for 20th (Thursday) only. I was fascinated to see how the opening price of Thursday morning was roughly true - there was no significant undershooting or overshooting. (Once again, click on the above graph to see it more clearly). There was a lot of turnover, but right in the first few minutes, the market basically got the closing price right. This IFCI story is a clean experiment because the firm is defunct; it has no expectations of cashflows that vibrate intra-day owing to news about the economy and the firm. The only news affecting the firm is the impending transaction (or lack thereof).

Through all this, the IFCI stock futures market was quite resilient. (As an aside, once a stock has futures trading on it, there are no price limits, which was essential to allowing these large price movements to take place unhindered). At closing time, the `market by price' of IFCI futures at NSE was:

I worked out the `liquidity supply schedule' (LSS) that's implied by this MBP:

The LSS shows the impact cost associated with all possible transactions. Negative values on the x axis pertain to selling while positive values pertain to buying. It looks quite liquid. At the touch, the spread is ~ 0.26%. The one-way impact cost for buying Rs.5.6 million is 0.23% and the one-way impact cost for selling Rs.6.2 million is 0.26%. The `market-by-price' display (of the top five prices) alone gets you to buying/selling over Rs.10 million, where impact cost of a tad beyond 0.3% is seen. All in all, it's a good display of market resiliency - a big price move took place, but the futures market was not spooked, atleast by NSE closing time. On the subject of resilience, you might like to see this.

1 comment:

  1. I think you discussed the right matter regarding you so that it is not balance in balance in India.


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