Operator-led cartels try to thwart short sellers by ‘banning’ F&O securities
Market operators are exploiting a technicality in the calculation of marketwide position limits in the futures and options (F&O) segment to push securities into the "ban period" at will.
Market operators are exploiting a technicality in the calculation of marketwide position limits in the futures and options (F&O) segment to push securities into the "ban period" at will, say brokers familiar with the modus operandi. This is being done mostly to thwart short sellers and keep the stock price firm, they say.
Once a F&O security is in the ban period, no fresh positions—buy or sell—can be taken. Traders can, however, reduce their existing positions in the security by liquidating their long positions or squaring up their short positions. Those still wanting to take a fresh position will be penalised by the stock exchange.
“A group of traders come together and trade a lot of ‘out-of-money’ options contracts among themselves,” said a broker.
“The margin requirement for out-of-money options contracts are lower, compared to futures. Traders part of the cartel will sell (write) a big contract, and buy a similar-sized contract, and crowd out other players,” the broker said. He said that the profit and loss in such trades did not matter as they were part of the same group.
The marketwide position limit is calculated on the basis of aggregate open interest—in futures and options contracts—and is linked to the free float market capitalisation. It is capped at 20 percent of the public shareholding.
What this means is that if the public stake in a company is 100 shares, then the open interest across futures and options contracts cannot exceed the equivalent of 20 shares.
When the aggregate open interest for any scrip exceeds 95 percent of the marketwide position limit, it is put in the "ban period" by the exchange. The normal trading in the scrip is resumed only after the aggregate open interest across exchanges comes down to 80 percent or below of the marketwide position limit.
There are trading member and client specific position limits, but brokers say these can be gotten around by routing trades through entities fronting for the operator.
In some cases, the security being in a ban period does influence the stock price.
For instance, shares of Infibeam had fallen from around Rs 1379 in the last week of March to around Rs 947 by early April.
However, the stock has been able to reverse a good part of that fall in April. Interestingly, Infibeam has been in the ‘ban period’ in the F&O segment for most part of this month, which meant short sellers could not have a go at the stock futures even if they felt the rally was unlikely to sustain.
Similarly, share prices of Ujjivan Financial Services have stabilised after a steep fall late in the first week of April. Ujjivan too has been in the ban period for most of April.
April futures of Ujjivan are quoting at a discount of over Rs 10 to the spot. Had the security not been in the ban period, arbitrageurs could have sold the stock and bought the futures, narrowing the price differential.
Many securities have been in the ban period for long periods, almost risking exclusion from the NSE’s list of F&O securities.
NSE regulations stipulate that “a stock which has remained subject to a ban on new position for a significant part of the month consistently for three months, shall be phased out from trading in the F&O segment.”
In the last five years, Indiabulls Real Estate derivatives have been in the ban period for 295 trading sessions, HDIL for 223 sessions, Jindal Steel for 158 sessions, Unitech for 122 sessions, Suzlon Energy for 105 sessions and Jaiprakash Associates for 104 sessions.
JP Associates has been in the ban period for nine out of the 22 trading sessions in January, and almost for the whole of February and March. Jindal Steel has been in the ban period for nearly half of the trading sessions in January, and almost the whole of February and March. In April too, it has been in the ban period for five trading sessions. Indiabulls Real Estate too has been regularly in the ban period for most part of the calendar so far.Also read: NSE probing F&O deals in Indiabulls Real Estate for suspected price manipulation