Stockmarket Meltdown: The Arbitrage Game
Source: BWI
Most people believe that the stockmarket crashed in May 2006 because the FIIs sold. But that’s part of the picture. Local punters played the highly leveraged stock futures market of early May. They had bid up the futures prices till they quoted at a hefty premium to spot prices.
During this period, the FIIs sold futures and bought in the cash market because of the arbitrage opportunity. They tried to gain by selling higher in the futures segment and buying lower in the cash segment. When the fall started on 12 May and futures became available at a discount, FIIs reversed their strategy.
Between 1 May and 12 May, FIIs sold a net notional amount of Rs 3,644.96 crore in the futures market while buying a net Rs 2,525.8 crore in the cash market. Between 15 May and 31 May, the position was reversed with the FIIs buying a notional amount of Rs 7,046.59 crore in the stock futures market while selling a net Rs 10,772 crore worth of stocks in the spot market. Netting out the cash and stock futures markets, FIIs were sellers, not only after 12 May when the market fell, but also before it.
Since 2 June, however, FIIs have been net buyers both in the cash market and in stock futures. Till 19 June, they bought a net Rs 3,515 crore of futures and Rs 2,422 crore in the cash market. That’s almost as much as they bought into the cash market in early May. So why hasn’t the index gone up? Because mutual funds have become net sellers. In the month to 18 June, they sold a net Rs 2,304 crore, while they had bought a net Rs 2,075 crore between 1 May and 12 May. The FIIs may have started the slide, but the local sellers are continuing it.
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