Hungry fund managers angry with India, call for upstairs market fix

As all institutional investors know, buying stocks in bulk can be a hassle in India. Traders of a large asset manager would have the chance to meet even a fifth of the total demand for individual funds. The rest will become a treat for independent buyers.

It’s a design quirk, which grew out of misplaced egalitarian sensibility and fear of the wrongdoing of business families.

Idiosyncrasy is not without cost. Imagine what would happen if a Nike store owner tried to greet a wholesale buyer in a crowded showroom and shouted to everyone that the next 15,000 pairs are getting a 15% discount. There would be a stampede. Other customers might rush to the checkout first, the store might run out of shoes, wholesale shoppers might come home disappointed. This is why most other markets have a well-established tradition of a “market up” for large orders that runs parallel to the “market down”. It just makes more sense to organize it that way.

But a preponderance of family-owned businesses in the country’s business landscape has made the Indian regulator reluctant to take a laissez-faire approach to side deals. What if majority shareholders, or “promoters”, set up hard-to-locate investment entities in offshore tax havens to gamble their own stock at home, which would complicate price discovery on the main exchange? So, the top market is only allowed to operate twice a day, for 15 minutes each time, and with strict price restrictions that make it inefficient.

A large buy order in Mumbai starts life like any other place: the broker matches a seller, maybe another institution. But if the agreed price implies a discount or premium over the previous close of more than 1%, the “block deal”, as these wholesale transactions are called, cannot be done in a separate window for traded transactions. . Orders should be entered in the main market screen, where other participants wait, as the bilateral agreement terms sheet has usually been disclosed beforehand.

In the ensuing take-out melee, big buyers experience a 70-80% slippage – orders go unfulfilled. With increasing institutional participation, the disappointment increases. Trying to acquire billions of dollars in stocks when there is no certainty of landing them is a costly business. Apart from a handful of stocks, Indian markets lack depth. Splash orders cause price creases. Algorithmic traders analyze signals of sudden changes in volume and introduce even more unnecessary volatility.

More efficient stock exchanges in Asia handle things differently. During normal market hours, Hong Kong allows the same broker acting for both a large buyer and a seller to execute trades that fall within 24 ticks of either the lowest bid or the highest ask. . (A check mark is the minimum possible change in a stock’s price.) To ensure proper signaling to players at the bottom, the exchange insists on a 15-minute reporting cycle. In case of dark pool trading, the disclosure time is 1 minute. Australia places no restrictions on the price at which bilateral agreements are concluded. Singapore only insists that they be made at fair market value.

Global investors urge the Securities and Exchange Board of India to fix the market to the floor. “Our members believe India’s price range for the block window should be at least +/- 7% like in Japan,” said Eugenie Shen, who heads the asset management group of the ‘Asia Securities Industry & Financial Markets Association, based in Hong Kong. “Slippage is a major issue for asset managers. Members want the same certainty of execution in India as in other markets. “

That’s a reasonable request, even though, according to Indian media reports, the securities council has asked the association to prove that others are using asset managers’ buying intentions to lead a stock. Frankly, that’s the job of the regulator. In one of the few studies of block trades executed on the main exchange screen, two professors at the Indian Institute of Management in Ahmedabad found that prices start to rise 8 minutes before an order goes up. major purchase does not hit the market. The regulator can easily update this 10 year old research.

In the low market, the seller of a big block pays a premium for liquidity. The wholesale buyer provides lasting information on what something may be worth. It makes no sense to allow this signal to be corrupted in an environment where large transactions are almost impossible to perform cleanly. As for the initial concern of business leaders to create an artificial market for their shares, over-regulation does not replace strong supervision and supervision. It’s time for India to take a more relaxed approach to what’s going on in the quieter corner upstairs. Making him busier would be a good start.

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