Trading pattern in Indian equity market is shifting. Retail investors are becoming averse to take on leveraged positions and the advent of algo-trading is threatening to change the entire equity trading landscape in the country. Mr Rikesh Vinod Parikh, Vice-President — Market Strategy and Product Development, Motilal Oswal Securities, talks about these issues in an interview with Business Line .
Excerpts:
How is the liquidity in the market in recent times?
Liquidity has been bad since the GAAR issue cropped up. This is because many FII brokers have stopped issuing P-notes. So that volume has dried up. These investors want some clarity. Once that clarity emerges, liquidity can revive. Institutional participation has reduced substantially due to this and fluctuation in price has also come down.
Both long-term and leveraged foreign investors have entered India since the beginning of this year. The additional liquidity infused by the Euro zone has flown across the world. It is not just India that has benefitted. All global markets have moved up.
What is the source of FII money that has come in to our market since the beginning of this calendar?
The source of money is a combination from various sources. It is also ETF money. In the beginning of this year, we had the CEO of JP Morgan saying that it is time to reduce holding in bonds and to move in to equity. People were under-invested in equity at that point so money has flown in to equity market.
What are the changes in retail trading pattern that you are observing over the last three to four years?
Investors have understood that leverage hurts. They have, therefore, reduced leverage and that is reflected in the lower open interest. Investors are now investing with a longer perspective. When market moves higher, they may again start trading but they seem to have realised that they should have limited leverage and slightly longer term horizon.
So what are you advising your clients now?
From 2008 to 2012 there is zero growth in the indices. In the same period, Sensex earning has grown from Rs 850 to Rs 1,100. Valuations are, therefore, down due to PE compression. We are trading at 13.5 forward multiples. Mean is around 15 multiple. So there is value and investors can invest with a slightly longer horizon.
We expect 100 bps policy rate cut in this year. Inverse relations of equity with interest rates will help strengthen prices. It will also help company bottom-lines. Once interest rates fall money from fixed deposits and so can flow back in to the market.
Recently, SEBI has issued warning to market participants to have risk-management mechanism in place. It also issued a circular on algorithmic trading.
What is the incidence of algo-trading in our market? Who are the parties involved?
SEBI has, for the first time, been pre-emptive and has issued a circular on algo-trading. The participants are largely proprietary books of brokerages or the FIIs. We are in to retail business so we do not facilitate algo-trading.
Only institutional clients can be allowed to do algo trading because clients need to have single code to execute these trades. Mostly institutions clients are given these codes. In algo-trading, the system generates the order and sends it to the trading terminal. You would have heard of Direct Market Access (DMA). Those doing algo trading use the DMA route. These trading terminals are directly connected to the exchanges.
What impact is it having? Are you seeing a price impact?
It has been said that the 2008 crash in Western countries was to a certain extent due to system trading. If the number of people doing algo trading increases, it can cause a systemic risk. This is because the system issues the trade as a market order not a limit order. So if the market does not have the depth the stock can hit the circuit limit. If the market is healthy and there are sufficient buy and sell order, it is not a risk.
SEBI has said that exchanges should have dummy filters in place. Because in case of Nifty and stocks traded in F&O, there are no filters. How this works is that when the stock hits the filter, trading will halt for 10 minutes or so. The exchanges will then have to manually restart trading on that counter.
There are also standard checks. Every order will have a quantity freeze and a value freeze that varies from one scrip to another.
There have been freak trades in the past. We have seen ACC trade at Rs 10. Recently in mini-Nifty there was a freak trade when it was trading at 3,500. Sometimes it can be a system error when the order skips the trades in between and trades at a lower value.
At a broker level, what kind of checks are you having now to ensure that clients do not exceed their limits and so on?
In retail or non-institutional level group there will be checks to ensure that the collaterals or margins are there.
The trade will go through only then. Each broker individually keeps a separate quantity filter. For a customer trading from the interiors of India, the quantity allowed can be relatively lower than that allowed for high net worth client.
These checks are largely system driven and automated. Service department does keep an eye on whether clients are going out of cover.
When you come to the institutional segment, there is a custodian clearing member in between.
When trades are executed, the clearing member accepts the trade and takes care of payment and receipt of shares. We only facilitate the trade and not the pay-in and pay-out. In these trades, we can have only broker-wise limit, quantity and value check.