Markets gear up for post-result swings

Markets gear up for post-result swings
The Financial Express, May 16, 2009

fe Bureau, Mumbai, New Delhi

As the stock markets see-sawed this week ahead of the poll results on Saturday, top market authorities have reviewed the systems in place to contain extreme volatility in the markets post-results.

On Thursday, the markets regulator Securities & Exchange Board of India held a detailed discussion with officials of the two key exchanges, BSE and NSE.

A source close to the development said Madhu Kannan, the newly appointed CEO & MD of BSE, met regulatory executives for a few hours of discussions. “Last time, two circuit-breakers were applied after the election results. Hence, it would be smart to be prepared,” said a Sebi official.

Other exchange officials and some key institutions were also called in for the discussions. However, when contacted by FE, NSE flatly denied the developments.

But the key data the regulators were poring over were comfortable this time around. The BSE Sensex closed at 12,173.42, up 2.53%, on Friday. The NSE Nifty too ended at 3,671.65, up 2.18%. The Nifty is, in fact, trading at a premium of almost 9%, indicating a trend for the markets to rise. In the cash segment, both foreign and domestic institutional investors were buyers on Friday. Analysts like Arup Mishra of Elara Capital said the markets have not shown any indication of tanking after the poll results, since the downside is anyway protected.

Similarly, the volume of trade in the futures and options market has been robust despite Friday being the last trading day of the week. The total open interest in the market has risen to Rs 77,678 crore, while Rs 1,774 crore was added in open interest. A rise in open interest indicates increased interest in the market. Open interest is the outstanding contracts held by market participants at the end of the day.

On Friday, the aggregate volume of trade on NSE eased to Rs 14,820 crore, off the week’s high of Rs 16,109 crore. This is almost 50% up from the average of Rs 8,000 crore in January this year, at the depth of the downturn in the markets.

On May 17, 2004, a day after the results were announced, the Sensex dipped to a low of 4,227.50 with a record intra-day crash of 793 points, following uncertainty over economic reforms and concerns over the policies of the Left parties. It was the first time market-wide circuit filters were activated to stop trading in any scrip for the day, when prices moved more than 20% either way.

“What Sebi is doing is a precautionary measure to ensure that nothing untoward happens in the market after the election results. However, unlike in 2004, when investors were on the wrong foot and were caught off guard in the crash, this time, given the current economic environment and other factors, investors are more cautious,” said Deven Choksey, managing director, KR Choksey Securities.

According to analysts at BofA Merrill Lynch, “Post-elections, near-term movement of the market tends to react to the nature and shape of the government. The market reacted negatively to a Third Front government in 1996 and to the left support to the government in 2004 — on both occasions the market was weaker for three months after the result announcement.”

BC Khatua, chairman, Forward Markets Commission, said, “We need not have to follow the Sebi pattern and cannot compare the commodity futures market with the capital market. The working of the two markets are different. Commodity prices mainly moves on demand-supply factors, not on sentiments.”