With the rise of multinational corporations, advances in computer technology, trade across boundaries and liberal foreign policies, it becomes a matter of interest to each government to protect its financial interests. India being a young and growing economy needs capital investment from developed economies to continue its growth story but at the same time must make sure that the investment remains at the financial level and does not interfere with the independence of the nation. While we need to reward investments and provide incentives for their participation we should always retain our sovereignty in politics, administration of the county, direction of growth and social welfare and policy. All this can come under threat if we are not a financially free nation. Wars with bombs are being replaced by financial instruments and in the recent past, many countries have fallen and citizens suffered due to the economic intervention by certain vested interests. Hence we coin the term financial security of India to areas that safeguard our financial independence so that the fruits of all our hard labor are retained for the benefit of the citizens as a whole.
It is an open secret that FIIs rig the Indian stock market. Even when the NIFTY fell from 4000+ to 2200 in a matter of few days in 2008, SEBI did nothing. The Indian economy was still sound and earnings still steady and it was clear that foreign money was playing. It is true that the global economy is interrelated but the effect of the slowdown was masked by the capital investments made by global trading firms. According to the data published by SEBI, FIIs account for only 5% of the investment amount that they have brought into the Indian capital market at the time of writing this article. But over a period of time it is estimated that they have grown their investments to 20% which means that they have made more profit steadily than the rest of the investors. Domestic investors are obviously paying for their profits but may not be yet aware of it because of the overall growth story. Less than 100 firms account for 60% of daily trading in the Indian markets and 90% of F&O are reportedly traded by FIIs. The value of F&O segment is 10 times the cash segment. While it may be argued that retail investors cannot be expected to understand the F&O markets, the domestic fund managers are supposed to be educated. The lack of their meaningful participation and ineffective regulation from the authorities allows the FIIs to move the markets at their wish.
It is true that foreign capital is required for the grown story of India, but the regulation should be favoring systematic steady investment rather than trading. The goals of this project are
1. To detect market manipulation by vested interests using high frequency trading algorithms
2. To come up with recommendations to the authorities on how to curb the manipulation
3. To open up this obscure information to the general public so that they can easily comprehend it
On May 6th 2010, over a Trillion dollars was wiped off from the US market in a matter of 10 minutes due to algorithmic trading. Though the market reclaimed 70% of the losses, only the traders and computers were fast enough to react. The retail investor bore the bulk of the losses as all his stop losses got triggered. It is difficult to prove these things and beyond the means of a retail investor to fight this. The government and regulating bodies are bound to protect his interests as he is the building block of the economy. An event such as this is good enough to wipe out the entire market cap of India and transfer the control over to the FIIs. So it is in the interest of our national security that the government invests in prevention of such a program or we may wake up one day to find out that we are the financial slaves of certain multinational corporations.
“Stock markets are nothing but gambling houses and we have to accept it”, Jesse Livermore had written in 1920s. We have had at least 3-4 generations trading in that time period of 90 years but human beings are the same and nothing has changed. So exchanges like the NSE and BSE will never act in a way that will reduce their volume or turnover. So the onus of protecting the retail investor falls on SEBI. Some of ideas that we can think of need subsequent research to prove their validity before being recommended to be a law and are listed below.
• F&Os are just contracts that can be written and purchased by any trader without having a physical backing. While they are instruments to protect the investments and allow the market to arrive at the right price quickly they should not be used to manipulate the price of their underlying entity. So F&O activity should be limited to a certain multiple of a trader’s cash market holdings.
• We have seen that the open interest in certain instruments rise and unwind in certain levels at record rates in short durations of time. We suspect that the same firm writes and buys such contracts and uses computers to open and close such trades in a short duration. Since there is no significant cost to writing the contracts and trading them (only the transaction charge and stamp duty which is quite small), we suspect that certain traders use this to set and change the market direction. We propose that the exchanges tag all the subsidiaries of trading houses and disclose big transactions in aggregate to prevent such manipulation.
• While liquidity of funds is important to investors, large and quick movements across the borders are bad of the growth. We propose to cap the flow of foreign funds on a daily basis to prevent manipulation of foreign exchange rates.
• We also propose to have circuits based on both price and volume of every instrument to prevent undue manipulation by entities with significant holdings or trading capital.
• We propose to increase the taxes on day trades and short term trades
• The brokerage charges are usually a tenth for intraday trades as there is no cost of processing the delivery of the scrip. With the computerization of the delivery process, the cost of transaction has been reduced considerably and the benefits can be passed on to the consumer. A certain amount of regulation to level this disparity may help long term investments.
• Indian markets do not allow Good till cancelled orders which are provided in most other markets. For a retail investor who systematically studies an investment and plans his entry and exit points, he must be able to retain the orders overnight. The burden of having to enter the order each day and inability to cover his positions or book his profits when he is involved with his daily livelihood is a big detriment to long term investment.
• Markets should provide trailing orders for increased retail participation. The bigger the retail participation the lesser the dependence on foreign capital. The retail participation in Indian market is just around 4% compared to 40% in developed markets. With the income levels in India rising, the working population is building up its ability to raise capital and also looking for it’s systematic investment. Such money should be given the highest priority to participate in our growth.