Steep market falls need deeper look

The velocity of the volatility in the stock markets and the ferociousness of the crashes, particularly Tuesday’s crash of over 600 points, calls for a deeper look into the functioning of the markets. This is more important as successive governments have been concerned about household savings not coming into the markets. Among the reasons trotted out for Tuesday’s fall is the delay in reforms, but there is nothing new about this as it is well known that the government never had the numbers in the Rajya Sabha to get the GST and Land Acquisition Bills through.

It would be prudent for finance minister Arun Jaitley to look into this and find a solution because, unless retail investors and household savings are channelled into the markets, the markets will have no depth. They will always be prey to selling by foreign institutional investors and market manipulators. It almost seems a ploy to frighten away household savings from the markets so that there is no balance and interested parties get a free run.

One of the serious fault lines in the Indian markets is the absence of physical settlement in the derivatives segment, which makes it more of a casino. Big traders trade recklessly in this segment compared to the cash markets as settlement is in cash, and not shares as is the case in more mature markets. Several chiefs of the Securities and Exchange Board of India have tried to bring in physical settlement, but in vain as there is a very powerful lobby against it. Besides, trading volumes in derivatives give the impression of volumes, which is meaningless.

Another important reason for the enormous volatility in the market is said to be the pick-up in algorithm trading, which is something many young techies are said to be getting into.

Very simply, while manual trades take time, in algo trading one can execute 10,000 trades in nanoseconds. There is also a herd mentality in algo trading. Algo trading exists in the markets of the United States, for instance, but they never witness the volatility seen in Indian markets as the US markets have depth.

All major markets have depth, but the Indian markets are extremely shallow because retailers have burnt their fingers, lost hundreds of crores of their hard-earned money over the years and have not got a paisa back. In the United States investors have got their money back through class-action suits but this facility does not exist here even after several market scams. Sadly, it reveals which side the government and the regulators are on. One hopes Mr Jaitley changes this anti-retail-investor situation.