tag:blogger.com,1999:blog-19649274.post115030442849212045..comments2024-03-29T12:03:50.891+05:30Comments on The Leap Blog: Trying to understand what happened on the stock market in MayAjay Shahhttp://www.blogger.com/profile/03835842741008200034noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-19649274.post-1150365342343621372006-06-15T15:25:00.000+05:302006-06-15T15:25:00.000+05:30If you take the SEBI data for FII derivatives acti...If you take the SEBI data for FII derivatives activity in May and leave out all the options trades, you’ll find that the activity (on a net buy basis) is pretty evenly distributed between index futures and stock futures. In fact the story from May 2nd to May 12th (when the Nifty hit 3700 odd) is, net buy in cash, net buy in index futures and net sell in stock futures. After this there is a complete reversal, esp. on days of large falls, with net sales in cash and huge buys in stock futures (much larger in magnitude compared to the buy/sell in index futures)…. which leads me to believe that most of the arbitrage activity is taking place between the stock and its corresponding futures contract. If this is indeed the case, we should expect that the basis for single stocks should be much closer to the fair value (thereby reflecting the cost of carry). We shouldn’t expect the kind of deviations in basis that we see in the Nifty futures (both on an intra day and end of day basis). <BR/><BR/>Don’t you think that the problem of IT that u mentioned should apply more to index arbitrage rather than simple single stock-future arbitrage? When you long/short the index future (depending on whether it is trading rich/cheap) you need to sell/buy the “index”-which is essentially a basket of stocks...now in other Asian markets like Japan/Korea, I have seen index arb traders using some complex algorithms to select an optimized basket of stocks when they want to buy/sell the index..These IT systems run the proper algorithms and automatically place orders almost on a minute by minute basis. In markets like India, I guess the trader has to use a lot more discretion because of which any deviations in Nifty basis may not be perfectly “arbed” away.<BR/><BR/>FIIs and trading volume- Yeah, data does show that the volume that they trade in derivatives is quite small. In fact if you look at the proprietary positions file for NSE members (on the NSE site) you’ll find that for the month of May’06, the average (daily) of prop open positions across members as a percentage of total open positions (client + prop) is about 40%. It may not be possible to conclude about trading volume from this directly, but a significant portion of the trading volume should be as a result of prop positions. It could be almost 30-40% of the 30000-40000 odd crore of derivatives trade daily..I would therefore guess that it is the prop trading of these members/brokers that moves the market more than FIIs!!Free Thinkerhttps://www.blogger.com/profile/03724960238076985720noreply@blogger.com