tag:blogger.com,1999:blog-19649274.post97003997282042595..comments2024-03-27T17:16:12.789+05:30Comments on The Leap Blog: Concerns about individual investors on the Indian equity derivatives marketAjay Shahhttp://www.blogger.com/profile/03835842741008200034noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-19649274.post-61859594756228439162015-01-08T00:20:07.230+05:302015-01-08T00:20:07.230+05:30I've been a regular derivatives participant ov...I've been a regular derivatives participant over 6 years now and have never made profit any single year despite constantly being glued to TV and trading systems. I'm reaching a point of no return as my accumulated losses have grown too large. I know many such people from various backgrounds who've gone into Peril through derivatives trading which is almost like an addiction. From my personal experience and that of people I know, I strongly feel that there should be stringent and high eligibility criteria so as to dissuade retail investors from gate crashing into this whirlpool which can potentially make them lose their life savings.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-32838773993035602012014-08-16T00:55:15.421+05:302014-08-16T00:55:15.421+05:30This is where public policy differs from academic ...This is where public policy differs from academic theorising about ideologies. India didnt wait for its own 9/11 event to then start implementing airport security and baggage screening procedures that slowed down passenger movements in airports considerably and are very inefficient. There was no "hard" evidence to show that lack of stricter security measures in airports in India would lead to plane hijacks. Another example - Michael Bloomberg, who made his fortune on Wall Street that embodies libertarian thought, as Mayor of New York strongly advocated and implemented a rule that said no restaurant can serve more than 16oz of soda to one customer. In New York city, one of the world's richest and educated cities, he didnt think people could exercise their freedom to decide how much soda to drink. Evidently, once in public life, he felt the need to think different from a libertarian Wall St practitioner. Argument here is simple - high retail participation in derivatives indulging in speculative trading driven by margin financing is both economically unproductive (doesnt lead to capital formation) and adverse selective (attracts other speculators). Is there an argument for why this is indeed good for India's economic development, haldi and other constructs aside?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-65158419618769903782014-08-14T20:50:45.298+05:302014-08-14T20:50:45.298+05:30The ideology of liberty and individual freedom is ...The ideology of liberty and individual freedom is precious in and of itself, and should not be cast aside without strong evidence in hand.Ajay Shahhttps://www.blogger.com/profile/03835842741008200034noreply@blogger.comtag:blogger.com,1999:blog-19649274.post-8606826566669718122014-08-14T20:49:54.406+05:302014-08-14T20:49:54.406+05:30There is one fact "retail participation is hi...There is one fact "retail participation is high in India by world standards". From that it does not follow that there is something wrong with it.<br /><br />Here is an example of how such reasoning goes wrong. Let's start with the fact: "Consumption of turmeric (`haldi') in India is high by world standards". Now imagine you make the giant leap and say "There is something wrong with it" and start proposing that the government should ban purchases of haldi by individual households, or tax it, or something of the sort.<br /><br />This is not permissible in serious public policy thinking.<br /><br />Before you claim that there is something wrong with haldi consumption in India being out of line, you have to show hard evidence that something is going wrong as a consequence.<br /><br />The Koreans have that evidence. Now the discussion shifts to the next stage: Do we have some levers in public policy through which something can change. <br /><br />That evidence does not exist in India.<br /><br />All that we have is:<br /><br />1. Retail participation in derivatives in Korea is high by world standards.<br />2. The Koreans have hard evidence that this is bad for those individuals. (There is no evidence that it's harmful for society at large).<br />3. Retail participation in derivatives in India is high by world standards.<br /><br />That's it.<br /><br />All you have is these 3 facts.<br /><br />To proceed from these 3 facts into suggesting that government do something to reduce retail participation is not logically sound.<br />Ajay Shahhttps://www.blogger.com/profile/03835842741008200034noreply@blogger.comtag:blogger.com,1999:blog-19649274.post-65674542439080453162014-08-13T12:34:13.936+05:302014-08-13T12:34:13.936+05:301: Casting aside ideologies of liberty and individ...1: Casting aside ideologies of liberty and individual freedom, the argument here is one of public policy issue of the current structure of our markets and its utility in serving its economic purpose<br />2: That derivatives is primarily an efficient hedging tool for investors which improves market efficiency doesn’t seem to be under dispute.<br />3: FIIs and DIIs that own 90% of free float market cap and presumably should hedge their portfolios account for merely 15% of derivatives trading value.<br />4: Retail investors as categorized by NSE data, whose ownership in equity markets is 7% of free float account for 40% of derivatives’ trading value. Clearly, this implies significant amount of speculative trading. <br />5: As per NSE’s classification of data, if there is a category called Institutional Investors, Retail and Proprietary, it is an accurate inference that the Retail and Prop categories are non-institutional. If derivatives is primarily a hedging tool for sophisticated institutional investors, then NSE’s data shows that between 87.6% to 83.5% of derivatives volume by value is by non-institutional investors over the last 10 years.<br />6: It is reasonable to assume that FIIs and DIIs have abilities to hedge their portfolios using futures and options through their brokers or custodians. The fact that we are one of the very few markets in the world with such a large single stock futures (136) market is suggestive of a cash equity cannibilisation feature of our capital markets. I.e. if I can buy Infosys at 10Rs margin in a single stock future easily versus having to pay 1000Rs to buy the underlying stock, it is apparent how investor behavior will be.<br />7: Net, net, it is indisputable from data that retail participation in derivatives in India is inordinately high which in itself is substantially larger than cash market volumes. It is also evident that retail derivatives volume is more to take directional bets with margin funding than the need to hedge their portfolio. This, as a public policy choice for India is undesirable is our argument. If someone can argue that high retail participation in speculative derivatives trading is good for the markets and serves a productive economic purpose in our current stage of development, then it will be good to hear that.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-53601907638823150122014-07-30T13:43:06.089+05:302014-07-30T13:43:06.089+05:30I have a casual acquaintance with NIFTY and single...I have a casual acquaintance with NIFTY and single stock options as a small time participant and I feel that one way to judge the efficiency of the of the equity derivatives is to study the lag by which a sudden correction in the cash market level gets priced in by the equity derivatives (in an arbitrage free world such adjustment should be instantaneous). However, as a participant , my experience has been that such cash to derivative transmission has been significantly slow in respect of single stock options. Moreover, the bid -offer spread in cases wherein there have been some transmission inevitably widens. There seems to be a few dedicated 'market makers' in some of the less liquid counters who seem to determine the pricing in those counters and seem to move the bid-offers in their favour. Obviously I cannot generalize my experience but I feel there seems to be a prima facie case of examining cornering / rigging in some of the less liquid option counters.Anonymousnoreply@blogger.com