Higher turnover, more responsibility

S. Vaidya Nathan

LAST WEEK, the National Stock Exchange (NSE) and the Bombay Stock Exchange almost attained Rs 75,000-crore turnover.

Even a year ago, the number was just Rs 20,000 crore. Such a spurt has significant implications for the market in terms of risk-containment systems and price trends.

Just like stock prices, the trading on the two exchanges were very volatile. Sample the last six weeks' numbers - Rs 45,275 crore, Rs 35,142 crore, Rs 57,526 crore, Rs 42,594 crore, Rs 66,109 crore and Rs 74,267 crore. In the past five weeks, turnover has almost doubled. Significantly, the stock prices are at similar levels with a rise of less than five per cent during this period, while turnover levels rose by 115 per cent.

Factors behind the spurt: A combination of factors appears to be behind the volatility and the spurt in trading on the NSE and the BSE. Among them are:

*Higher level of trading by FIIs and domestic mutual funds. The year 2000 has seen record purchases and sales by the FIIs though the net inflows are in line with the past trends.

*Day trading may also be playing a part though it is not clear if individual investors are behind it in a big way, as in first quarter 2000. In the recent weeks price action has been concentrated on a narrow range of stocks.

*With much of the trading volumes concentrated in such stocks as Global Tele-Systems, Himachal Futuristic, DSQ Software, Zee Telefilms, Infosys, Satyam Computers, Wipro and Sterlite Industries, all of which have a fairly concentrated shareholding pattern, the trend suggests a high degree of intra-institutional, inter-institutional and operator-driven activity.

*That most of the top 25 stocks in terms of NSE turnover are telecom and IT stocks (19 out of 25 in Friday's trading) is worth noting. As this has had a down-the-line impact on other stocks in these sectors, the volumes appear to have got a boost on the price side as well. Most of these stocks have recovered after the fall in February-June period.

*Just the volumes in the past two weeks have pushed the NSE into a new orbit. Otherwise, it would have seen volumes in the Rs 20,000-30,000 crore range in the first quarter of 2000 when the technology/telecom/media stocks were at much higher price levels. On an average, prices in this triad are lower by around 40 per cent from their peak levels. This clearly points to an enhancement in the number of shares traded. The same holds good for the BSE.

*The higher degree of activity in the NSE's Automated Borrowing Lending Mechanism appears to be playing a role as NSE-based traders may now feel more comfortable about open positions than in the past. Badla volumes on the BSE have risen with much of the value concentrated on 10 stocks.

*The requirement that more and more stocks ought to be traded in paperless (dematerialisation) mode may also be a factor behind the spurt in trading activity. The process is more hassle-free than at any time in the past.

Investment implications: The fact that the current price trends in the IT and telecom sectors are accompanied by higher volumes can be seen as a positive indicator of the quality of price formation now compared to the trends during the bull run in the first quarter of 2000.

However, what is disturbing is the volatility in the level of total activity which points to concentrated trading action in certain weeks. A high level of liquidity of this kind is not necessarily a confidence-boosting factor as moves by institutional investors and closely-linked operators tend to have an exaggerated impact.

With markets also showing largely flat trends, the risks may well have got accentuated in the past few months. In this kind of a market, especially in technology and telecom stocks, it may be better for investors to go the mutual fund route. Funds (especially with FII links) are better placed in terms of trading patterns and information flow on corporate action.

In addition, this route may also ensure diversified exposures to of tech/telecom stocks, and may help avoid risks of taking direct exposures in select stocks; retail investors are at a disadvantage in this respect. At the same time, investors can participate in the growth opportunities in these sectors and any gains from trading momentum (which has its own risks).

Big burden on NSE/BSE: With turnover levels spurting, the NSE, the BSE and the Securities and Exchange Board of India (SEBI) have a major responsibility in ensuring that the market remains largely safe. A more rigorous monitoring of trading patterns, long and short positions, activity in the badla and ALBM markets and exposure limits is called for. While expansion in trading volumes need not be an alarming factor per se (NSE has talked of a Rs 20,000 crore daily turnover by the end of 2000-01; the BSE has similar ambitions), the trading trends ought to make regulatory authorities more clued in to what is happening in the market place.