Friends I have posted a news letter received from my broker.Kindly express your views regarding this subject
THE CURRENT MARKET SCENARIO
Dear Investor, 28th Jan 2008
The recent sharp fall in the Stock Markets has caught everyone by surprise. While people do have been talking about a correction since quite some time, the ferocity, the sharpness and the speed was beyond any ones comprehension. The BSE Sensex fell over 5800 points within 8 trading days, which was against our wildest imagination. No one was prepared for this, whether it was our retail investors, HNIs, our Stock exchanges or the stock broking fraternity including, the so called high profile national level brokers who had collected hundreds of crores of rupees in public issues or in private placements. No one was spared.
The retail investor who was trading in the futures markets was totally (virtually)wiped off. Brokers had started squaring off clients F&O positions, where there was shortage of margin from last Friday the 21st on wards. But finally the clients positions were thrown off in the markets by frantic brokers when they saw huge pay-ins(which nobody seemed to be able to honor), on Tuesday after the markets hit down ward ceiling and then reopened for trading, to avoid further pay-in commitments.
What has triggered the fall? As we are all aware the American economy is reeling into recession caused by the Sub-Prime housing loan issue which surfaced several months back. Many high profile international financial institutions, who had exposure in this sub prime housing market, has been facing huge losses and started booking profits, especially in emerging markets including Asian markets. The selling also spilled into the Indian markets.
Though this triggered the fall, the reasons for the crash lies else where.What really caused this blood bath? Total Systemic failure, the exchanges, our banking system, all of which failed miserably. All are aware that we have the T+2 settlements in the cash markets and the T+1 settlement in the derivative markets. In the Derivative markets, this means that the MTM pay-in of today has to be ready in the brokers settlement account with the clearing bank, the next day at 10O clock, or else the trading terminal of the broker will be disabled with immediate effect. MTM loss in simpler terms is the collective losses (Mark To Market difference between the previous days and the days closing rates) of all outstanding positions held by a broker on behalf of clients. Now a days most brokers usually collect margin from clients as stocks, and to meet MTM losses he has to pay out of his own hands. The extent of MTM loss will be clearly known only at 3.30 depending on the rates at which the market closes. And the broker has to make good the payment by 10 next morning! From where in the world can he raise funds in case the pay-in has exceeded his available funds in an hours time before the banks closes!? Even if he sells of the shares of the clients, given as margin, he can realize the funds only on the third day at 4 PM, as in the cash markets we have a T+2 settlement! The only recourse a broker had was to cut off the clients position, so that he can release whatever cash margin he has deposited with the Stock exchange, which can be adjusted against the next days pay-in. And even if a client who had ample money in his bank account, offered to give a check for the difference, how can it be used to make the pay-in the next day morning?
Our banking system is not geared to follow a T+1 settlement. How many days it takes for a bank to clear a cheque, in India? If I deposit a cheque with our clearing bank today, the proceeds are credited only two days later! And in the US all banks are interlinked by V-Sat net work, and if a cheque is presented at any bank, the proceeds are credited instantaneously. And they have T+3 and we have T+2!! If the instantaneous transfer was available in our banking system, this crisis would have never occurred. The broker is only an intermediary who is totally helpless in such situations, at the whims and fancies of the rules and regulations set by the authorities.
In normal situations most brokers are financially geared up to handle a fall of a few thousand points over a period of time. But when markets fall intraday more than 2000 points on a single day on a continuous basis and brokers have pay-in worth several times there net liquid funds, there is bound to be pandemonium as we had seen last week. A fall of a few percent in single day futures can we digested, but when individual scrips fall 30 and 40% intraday, while a broker has collected hardly 15% margins,that is bound to be the situation. Brokers had to sell off clients positions in-order to avoid a payment shortage to the exchanges, which can cause the brokers terminals to be disabled, or even a broker being declared a defaulter, which is the end of the road for any broking house.
When there is shortage of MTM margins, though it is the clients responsibility to maintain sufficient cash margins to cover them, it is true that most brokers usually cautioned the clients to bring in additional margins, before squaring off positions. But on Tuesday when the markets hit downward ceiling within a minute of opening at 10.56 on wafer thin volumes, and was closed for one hour, the pay-in amounts visible on their monitoring terminals were staggering. That is why brokers started squaring off positions as soon as the markets opened. Even relatively small broking houses had thousands of clients having positions in F&O. How can he be expected to call individual clients to ask for permission to cut off positions, when the markets where crashing further down.
The end result was that most brokers were not able to make their pay-in obligations of Tuesday, especially in the F&O markets, which resulted in almost 70% of F@O terminals in the country being shut over the week. And those who were working where not taking buy orders. And to add injury to wounds NSE was increasing margins every day, so that even though open positions were being cut, the next day brokers were finding that their margin obligations were much higher than the previous day. Which meant they had to pay more money, to keep their existing positions intact? For positions the brokers took for their clients at 15 % margins, it was raised to as high as 95% for some volatile scrips. Another 5% and you can take delivery of the scrips in the cash markets!! The margins ranged between 35-95% depending on the volatility of individual scrips. All popular counters which had moved up recently, and in which most clients had position had margins any where between 70 and 90%. Not to blame NSE, how can they manage risk when individual scrips are falling down 30 and 40%! So now most brokers are maintaining positions of clients in F&O only if they maintain these high margins in Cash. Other positions have mostly been squared.
Even the cash terminals of several broking houses were closed. Most, which were open where not taking buy orders at all. Some were taking orders against cleared credit balances of clients. Very few were accepting demand drafts. Fewer of them where accepting cheques. This was the pathetic situation all over India. TV channels where showing frustrated investors screaming their displeasure at being denied the opportunity to buy quality scrips at throw away prices. Who is to blame??
Where from here? Well the retail investor in the Derivative markets has been totally wiped off. The total positions in the derivative markets have unwound to almost 30-40% of the peak. The combined volumes in the two exchanges have come down to one third of the earlier peak volumes. Who has the money to trade after all? The retail participation was near zero. It may take several months for them to recover the shock and return to the markets, if at all they have the money or courage to do so.
As far as the genuine long term investors in the cash markets, there is nothing to worry. Nothing has changed fundamentally. Our long term targets are still intact. In the shorter term things may take time to become normal. Any falls are only opportunities to buy. This correction will definitely leave the market healthier in the longer term.
But the price everyone had to pay is beyond comprehension!
..........!
THE CURRENT MARKET SCENARIO
Dear Investor, 28th Jan 2008
The recent sharp fall in the Stock Markets has caught everyone by surprise. While people do have been talking about a correction since quite some time, the ferocity, the sharpness and the speed was beyond any ones comprehension. The BSE Sensex fell over 5800 points within 8 trading days, which was against our wildest imagination. No one was prepared for this, whether it was our retail investors, HNIs, our Stock exchanges or the stock broking fraternity including, the so called high profile national level brokers who had collected hundreds of crores of rupees in public issues or in private placements. No one was spared.
The retail investor who was trading in the futures markets was totally (virtually)wiped off. Brokers had started squaring off clients F&O positions, where there was shortage of margin from last Friday the 21st on wards. But finally the clients positions were thrown off in the markets by frantic brokers when they saw huge pay-ins(which nobody seemed to be able to honor), on Tuesday after the markets hit down ward ceiling and then reopened for trading, to avoid further pay-in commitments.
What has triggered the fall? As we are all aware the American economy is reeling into recession caused by the Sub-Prime housing loan issue which surfaced several months back. Many high profile international financial institutions, who had exposure in this sub prime housing market, has been facing huge losses and started booking profits, especially in emerging markets including Asian markets. The selling also spilled into the Indian markets.
Though this triggered the fall, the reasons for the crash lies else where.What really caused this blood bath? Total Systemic failure, the exchanges, our banking system, all of which failed miserably. All are aware that we have the T+2 settlements in the cash markets and the T+1 settlement in the derivative markets. In the Derivative markets, this means that the MTM pay-in of today has to be ready in the brokers settlement account with the clearing bank, the next day at 10O clock, or else the trading terminal of the broker will be disabled with immediate effect. MTM loss in simpler terms is the collective losses (Mark To Market difference between the previous days and the days closing rates) of all outstanding positions held by a broker on behalf of clients. Now a days most brokers usually collect margin from clients as stocks, and to meet MTM losses he has to pay out of his own hands. The extent of MTM loss will be clearly known only at 3.30 depending on the rates at which the market closes. And the broker has to make good the payment by 10 next morning! From where in the world can he raise funds in case the pay-in has exceeded his available funds in an hours time before the banks closes!? Even if he sells of the shares of the clients, given as margin, he can realize the funds only on the third day at 4 PM, as in the cash markets we have a T+2 settlement! The only recourse a broker had was to cut off the clients position, so that he can release whatever cash margin he has deposited with the Stock exchange, which can be adjusted against the next days pay-in. And even if a client who had ample money in his bank account, offered to give a check for the difference, how can it be used to make the pay-in the next day morning?
Our banking system is not geared to follow a T+1 settlement. How many days it takes for a bank to clear a cheque, in India? If I deposit a cheque with our clearing bank today, the proceeds are credited only two days later! And in the US all banks are interlinked by V-Sat net work, and if a cheque is presented at any bank, the proceeds are credited instantaneously. And they have T+3 and we have T+2!! If the instantaneous transfer was available in our banking system, this crisis would have never occurred. The broker is only an intermediary who is totally helpless in such situations, at the whims and fancies of the rules and regulations set by the authorities.
In normal situations most brokers are financially geared up to handle a fall of a few thousand points over a period of time. But when markets fall intraday more than 2000 points on a single day on a continuous basis and brokers have pay-in worth several times there net liquid funds, there is bound to be pandemonium as we had seen last week. A fall of a few percent in single day futures can we digested, but when individual scrips fall 30 and 40% intraday, while a broker has collected hardly 15% margins,that is bound to be the situation. Brokers had to sell off clients positions in-order to avoid a payment shortage to the exchanges, which can cause the brokers terminals to be disabled, or even a broker being declared a defaulter, which is the end of the road for any broking house.
When there is shortage of MTM margins, though it is the clients responsibility to maintain sufficient cash margins to cover them, it is true that most brokers usually cautioned the clients to bring in additional margins, before squaring off positions. But on Tuesday when the markets hit downward ceiling within a minute of opening at 10.56 on wafer thin volumes, and was closed for one hour, the pay-in amounts visible on their monitoring terminals were staggering. That is why brokers started squaring off positions as soon as the markets opened. Even relatively small broking houses had thousands of clients having positions in F&O. How can he be expected to call individual clients to ask for permission to cut off positions, when the markets where crashing further down.
The end result was that most brokers were not able to make their pay-in obligations of Tuesday, especially in the F&O markets, which resulted in almost 70% of F@O terminals in the country being shut over the week. And those who were working where not taking buy orders. And to add injury to wounds NSE was increasing margins every day, so that even though open positions were being cut, the next day brokers were finding that their margin obligations were much higher than the previous day. Which meant they had to pay more money, to keep their existing positions intact? For positions the brokers took for their clients at 15 % margins, it was raised to as high as 95% for some volatile scrips. Another 5% and you can take delivery of the scrips in the cash markets!! The margins ranged between 35-95% depending on the volatility of individual scrips. All popular counters which had moved up recently, and in which most clients had position had margins any where between 70 and 90%. Not to blame NSE, how can they manage risk when individual scrips are falling down 30 and 40%! So now most brokers are maintaining positions of clients in F&O only if they maintain these high margins in Cash. Other positions have mostly been squared.
Even the cash terminals of several broking houses were closed. Most, which were open where not taking buy orders at all. Some were taking orders against cleared credit balances of clients. Very few were accepting demand drafts. Fewer of them where accepting cheques. This was the pathetic situation all over India. TV channels where showing frustrated investors screaming their displeasure at being denied the opportunity to buy quality scrips at throw away prices. Who is to blame??
Where from here? Well the retail investor in the Derivative markets has been totally wiped off. The total positions in the derivative markets have unwound to almost 30-40% of the peak. The combined volumes in the two exchanges have come down to one third of the earlier peak volumes. Who has the money to trade after all? The retail participation was near zero. It may take several months for them to recover the shock and return to the markets, if at all they have the money or courage to do so.
As far as the genuine long term investors in the cash markets, there is nothing to worry. Nothing has changed fundamentally. Our long term targets are still intact. In the shorter term things may take time to become normal. Any falls are only opportunities to buy. This correction will definitely leave the market healthier in the longer term.
But the price everyone had to pay is beyond comprehension!
..........!