Saturday, January 06, 2007

Nice articles & the story of jobbers/arbitrageurs to begin the new year!

Today's Business Standard has some nice articles, one by Surjit Bhalla and the other by T N Ninan. The first one talks about the fiscal deficit where Mr.Bhalla argues that the RBI probably has it wrong (almost the same way it got it wrong in the mid-nineties) and that the hike in interest rates may not have been necessary, here's the link. The other one by T N Ninan argues in favour of opening up of sectors thereby inducing greater private sector participation. Here's the link.

The last week of 2006 witnessed listing of the once unknown, but now famous, Nissan Copper. The company came out with a public offer of 64.1 lakh shares at Rs.39 and it barely managed full subscription. However, it witnessed a phenomenal listing.

After opening at Rs.40, the scrip shot up to over Rs.100 and clocked volumes of over 13 crore shares (BSE + NSE). In comparison, the company's total shares outstanding is a mere 1.45 crore shares. After recording a gain of over 300 per cent on the opening day, shares of Nissan Copper hit the 20% upper circuit (ie. Rs.157 per share) on the subsequent day. But, it could not hold on to these gains and ended the second day at Rs.118, down 10%. Its been hitting lower circuits (5%) ever since and closed at Rs.101 on 5-Jan, down a whopping 36 per cent from the top of Rs.157, but still a phenomenal 159 per cent above the issue price. Look at the statistics for the five days of Nissan Copper's trading:

Date, Issue price, High, Close, Volume (BSE+NSE)
29-Dec-06, Rs.39 , Rs.137, Rs.131, 131,096,640
02-Jan-07, -NA- , Rs.157, Rs.118, 46,919,015
03-Jan-07, -NA- , Rs.112, Rs.112, 38,324

04-Jan-07, -NA- , Rs.106, Rs.106, 27,323
05-Jan-07, -NA- , Rs.101, Rs.101, 5,260

Sucheta Dalal has a nice article on this here.

While everyone has been talking about price manipulation and circular trading (which I think was quite apparent in this case), I decided to look at something else - the bulk deals data (available both on the BSE and NSE).

In all 64 bulk deals were reported on the BSE. Together they accounted for 59 per cent of the total volume on the BSE, ie. around 3.6 crore shares out of a total of 6.1 crore shares. However, one interesting aspect of this was that a major portion of these bulk deals were done by jobbers/arbitrageurs.

These are people (hired mostly by marwari & gujarati proprietary brokers) who purchase securities on one exchange (say, BSE) for immediate resale in the other exchange (say, NSE) to profit from the price differential. More often than not the differential is less than a percent. Arbitrageurs who frequently report differential of over a percent are monitored and are infact fired if they are persistantly found to be squaring up trades at higher price differentials (4-5% is considered very high in this kind of a job since higher differentials indicate speculation whereas these people are hired to do arbitraging, interesting isn't it?). So how much did these guys make that day: Rs.25 lac. That, on a turnover of Rs.211 crore and a volume of 2.3 crore shares on the BSE.

The profit numbers may look miniscule in comparison to the turnover that these jobbers generate but they are not unusual. Jobbing/arbitraging is a sprawling business and a tremendous employment generator. There are virtually thousands of pple employed in Bombay just to do one thing, buy on BSE and sell on NSE. My gut feel is that they contribute a substantial portion to the daily volumes on both the BSE and NSE. I think the number could be around 15-20% (I could be overestimating this, but I would like to be corrected here!). This business works in the following fashion:

A broker employs two pple, one to monitor prices on the BSE and the other to monitor prices on the NSE. The profit sharing works like this: 50-60% goes to the broker and the rest is divided amongst the two. The broker gives these two pple some shares to play with, say for example 10,000 shares of Reliance Petroleum. These two jobbers are now expected to buy and sell these shares whenever they see a difference in the price on the BSE and NSE. So for eg. if Reliance Petroleum is trading at Rs.61 on the BSE and at Rs.61.25 on the NSE, these guys would quickly buy 10,ooo shares of RPL on the BSE and sell them on the NSE @ Rs.61.35, in the process making a risk-less profit of 35 paise or Rs.2,500. Sometimes the difference in price in lesser. Once this transaction is executed these pple look for a reverse transaction, ie. a lower price on the NSE to buy and a slightly higher price on the BSE to sell so that at the end of day they have squared up their positions on the two exchanges. Even if they do not get this opportunity, they still make the profit, because the broker has provided them with 10,000 shares, which can be delivered. The delivery of 10,000 shares plays a crucial role in this whole thing since it provides a sense of security, in times when share prices witness sudden spurts and squaring becomes a loss making propostion.

A lot of the business on the BSE & NSE is done by such jobbers/arbitrageurs and not by small retail investors (as many of us would like to believe). These pple (mostly undergraduates from Rajasthan, especially from Phalodi and Gujarat) flock to stock markets when they are booming and generate significantly higher volumes. An average jobber makes something like Rs.10-12,000 per month, substantially more than compared to what they earn back home. They live here in dormitory-like houses in North Mumbai, almost same as the factory workers in China, share their rents, cook on their own, so that at the end of each month a third of their earnings can be sent back to their villages/towns. I wonder what will happen to these pple the day program trading in allowed in India?


The Nissan Copper scrip continues to hit lower circuits and was quoting at Rs.82.4, down almost 50% from its peak of Rs.157. Volumes too remain shallow. The scrip attracts volumes of less than 10,000 shares on both the NSE and BSE. Given its fundamentals, the first price target for the scrip on the downside could well be the issue price, and maybe further down. ;)

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