At least two events in the recent past must be fresh in your memories – The recession and the rise in food prices. Both these events are manmade events. Further they are market made events and anybody with a little insight into the financial markets will tell you that too. When somebody mentions the stock market, you may shutoff saying that you are not interested, you may think it is a game of guessing, you may think that it is a concern for only a class of society, you may make it a topic for conversation or any other thing. It does not matter. What really matters is the truth that it governs what happens to each and every stage of your life whether you like it or not or you even know about it. In the past natural disasters and wars used to cause recessions and turmoil. Now with physical slavery abolished, nations just wage economic wars and use weak countries unfairly to fill in for their material greed. Outsourcing to India and manufacturing in China was a result of somebody pushing a few buttons in Wall Street. Whatever happens to your job situation in Bangalore or the lives of companies like Infosys is completely driven by a few people in NY, whose names you may not even know. A poor Indian who was accustomed to pay around Rs.20 per kg of rice is now paying twice albeit if he does not know how to spell stock because some hedge funds messed up in Chicago. What globalization means now is that everybody’s life is interconnected to the markets.
Till recently Indians had very little disposable income and a very small portion of individual investments was ever placed in the stock market. Now with the new economy, the rise in the middle class has created new opportunities for the small investor to grow with the economy. The only sad part is that the Indian markets are completely rigged by the FIIs. Since the size of Indian market is small, a few big players come in and loot the retail investors and domestic Indian funds. Our line of defense, are the traditional Indian firms like LIC and SBI which hire fund managers for a salary and work like govt. offices. No wonder the algorithmic players get away with murder. Till recently LIC used to own 30% of the SENSEX companies. Not that they are the smartest, but they have old money and a steady stream of revenue. The people of India keep handing them a 50,000 crore check every year. But in the long term the FIIs are just robbing them of all their money and in a few years I will not be surprised if all their money gets absorbed by FIIs. How do they do this? There a few trading firms like G and N, that use computers for trading. They have developed algorithms on applying pressure to the market and make it move the way they want. They have huge capital, trained manpower and own the press. They play with investor psychology and control all the Governments of the world. They keep buying and selling stocks to themselves across different computers and generate market activity and drive prices to generate trends. To add to this Indian firms have not developed any computer algorithms, have not understood the hedging patterns and the Govt. does not have the right laws or even means to detect existing violations. To make the matters worse, modern trading is something new to India, less than 5 yrs old and all fund managers are young and have not weathered many economic cycles. Traditional fund managers are used to trading in old markets where the systems and factors were different and now obsolete. Those who evolve are quickly absorbed in good paying jobs for the FIIs. As a result the general population of India is defenselessly naked.
THE SOLUTION (APPROACH):
As individuals we cannot do much to change the FIIs from what they are doing. As public watchdogs we cannot complain to the regulating authorities because we cannot easily prove their wrongdoings. As investors we cannot participate in what G is doing. They manage your funds only if you invest greater than $100M. Even if you were to buy their stocks, these firms are notorious for not handing much back to the stock holders. They give huge bonuses to their employees which accounts to more than 50% of their profits. So if you want to participate in their profits, you can opt to work for them but it will take you several years to reach there.
The good part is that the Indian stock exchanges, NSE, BSE … share their data for free. Most exchanges around the world charge for it there by eliminating small time people from analyzing the data. Hence not many tools and programs are available for analyzing them in the free and open source domain. We can become students of the market and analyze what they are doing and how they are doing it. If we start seeing the patterns we can predict what they will do. We may then choose to counter them, ride with them or blow the whistle – what ever!! But first we have to analyze the data and see the patterns. Data does not lie. The past year was a very volatile one where the markets dived down and then recovered a fair deal of it. Most participants are still in the red. But it is amazing to look at one such trading firm’s numbers. They lost only one day in all 263 days and made more than 100 million every other day. They made money when the markets went down, they made money when the markets came up, and they made money when the market was flat. That tells us that stock markets are not that unpredictable after all. There are a few more firms of this caliber or even better but their numbers are not out for the public. There are some dark horses who understand these moves and make money but they keep out of the public lives.
What I propose is to build a set of tools to analyze the markets. I am thinking of exposing them as a web application running on a Microsoft .Net platform and hooking up with the exchanges on the back end. We shall have to write some quick programs to set up the data streams and code the logic to analyze different heuristics. At this point I do not what will become of the project. We have to find some crystal ball that tells us what the markets are doing. I do not know if we will succeed or how long we will pursue this quest. But if the idea excites you and you can find the motivation to donate some coding cycles, please get back to me and I will keep you in the loop.