MC Explainer: Who made money during the election results week

Retail investors net sold Rs 1,770 crore worth of shares, and FPIs net bought Rs 1,540 crore. But the real action was in the derivatives market, where foreign investors went into an overdrive, short selling index futures in anticipation of a subpar verdict for BJP.

There was a political slugfest over the counting day weekend, with Congress leader Rahul Gandhi demanding a Joint Parliamentary Committee probe into the frenzied stock market activity ahead of the exit poll results. He also questioned the Prime Minister, Home Minister, and Finance Minister for their bullish post-election forecasts about the market. Commerce minister Piyush Goyal countered the accusation saying retail investors actually benefited from the market crash on June 4 by buying stocks when prices fell.

The stock market world is far more complex than the headline numbers suggest. Here’s a snappy breakdown of the market madness from last week, giving you a peek into how the various players navigated the chaos. Who bought, who sold, and who gained and who lost.

Also read: The final tally: Stocks that gained the most in the election rally

There was a huge surge in trading volumes on Friday, just a day before the exit polls. Who was buying?

Trading turnover was twice the average for the preceding week, but hold your horses, it wasn't just traders betting on the elections. The real kicker was the MSCI index rejig. The MSCI India Index is benchmark for passive funds, and about $2 billion in passive flows hit the market that day. Hedge funds were scrambling to buy and sell stocks ahead of the rejig to make a quick buck when the changes kicked in.

How were the different players positioned ahead of the exit polls?

Retail investors net sold Rs 1,770 crore worth of shares, and FPIs net bought Rs 1,540 crore. But the real action was in the derivatives market, where foreign investors went into an overdrive, short selling index futures in anticipation of a subpar verdict for BJP. Retail investors, on the other hand, held on to their bullish positions in index futures, betting on a strong mandate for BJP.

How did these investors react to the results on Monday?

On June 3, both foreign investors and local institutions went on a shopping spree, snapping up stocks. Retail investors used the opportunity to cash out and would have made a tidy profit from the higher prices.

Did everyone who owned stocks that day make money?

Not quite. Nearly 2,375 stocks advanced, but 1,565 stocks dived, and 151 stocks stayed put. In other words, for every three stocks that rose, two stocks fell.

What happened in the derivatives market?

Foreign investors were quick to cut their short positions in index futures. When the market turns against you, holding onto loss-making positions means having to shell out more margins without knowing if things can get worse. Foreign investors slashed their net short position by about 38%, from 3,18,367 contracts to 1,96,944 contracts. The squaring up of short positions by FII further fuelled the rally in the Nifty.

Meanwhile, retail traders upped their net long positions by 39%.

How were positions in individual stock futures?

In individual stocks, foreign investors and retail traders were both long, while domestic mutual funds were at the short end. Domestic mutual funds usually stick to arbitrage trades, going long and short simultaneously to profit from price inefficiencies, so their short positions shouldn't be seen as a bearish call on the market.

Who were the biggest sellers when the market collapsed on Tuesday?

In the futures segment, the biggest sellers were foreign investors, who added to their index shorts and ended the session with a net short position of 3,55,379 contracts. Retail traders, on the other hand, were the biggest buyers, boosting their net longs to 3,33,364 contracts.

What about the cash market on that day?

In the cash market also, foreign investors sold Rs 12,500 crore. Local mutual funds also sold Rs 6,250 crore worth of stocks, but retail investors dove in headfirst, snapping up Rs 21,000 crore worth of stocks despite the market tanking by over 6%.

How did individual stocks fare when the market crashed?

On June 4, nearly 90% of the stocks (3,401) were in the red. It was a bloodbath.

So, when the market fell, almost all stocks fell, but when the market went up, only two-thirds of the stocks rose?

You got it!

Can we say retail investors have emerged smarter in hindsight?

As long as the market keeps climbing, consistent buyers end up winning. On June 3, the market opened with a bang and stayed strong, so those who sold out likely benefited from higher prices. On June 4, the market opened weak and kept sinking, so investors entered and exited at various levels. So it’s more like a mixed bag—some would have made money, others wouldn’t have.

What about this conspiracy theory that foreign investors made money in the market spike that happened after exit poll?

The categorisation of foreign and domestic investors is a bit off. These groups are far from homogeneous. Among foreign investors, you've got everyone from pension funds holding stocks for the long haul to high-frequency traders making moves in nanoseconds, and a dozen other types with different return expectations and time horizons in between.

Can you tell who made money at all?

No. There may be “connected” players in the local markets, as well as money masquerading as foreign inflows that is routed back into local market through hawala. Only regulators with access to specific account-wise transactions can clarify the nature of money that came in or went out during any specific time-frame.

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