(1888PressRelease)
May 27, 2009 - CNI Research Limited, the leading BSE Listed research company that focuses on small & mid-caps, today released its study on Reasons of Market Volatility.
CNI Research Ltd. undertook this study in order to find out the reasons for the excessive volatility in the market. For this purpose CNI focused on the F&O segment, as a mirror for the markets at large. A comparative study of the values in 233 scrips was undertaken, on the day the new lot sizes were implemented (27th of February, 2009) and the last trading session of the last week (22nd of May, 2009). There were 250 scrips trading in the segment in February 2009 out of which 17 were removed, so an analysis of 233 is available in the study.
CNI Research Ltd. finds that the rise in the lot value (with the size remaining the same) and increase in margins in derivatives are the main reasons for the huge volatility in the share market.
Generally the value of the lot size is by default decided to be around Rs 2 lacs per lot. As on 27th Feb 2009, the day the new lot size were implemented, 194 companies were around the Rs 2 lac value size and 23 companies were above the Rs.4 lacs bracket(which could be due to the fact that the share prices rose in these scrips after the announcement to the date of implementation).
From the data available, CNI arrived at some definite findings:
· As on 22nd May 2009, only 59 companies remained in the bracket of Rs 2 lacs to 4 lacs from 194 companies
· 108 companies came in the bracket of 4 lacs to 6 lacs as against 23 before
· 65 companies even crossed the bracket of Rs 6 lacs and above as against zero before
This has increased the risk for traders substantially requiring high amount of margin.
CNI study has revealed that the margin system has helped many traders and operators to use the system to their advantage. When the markets are rising, the operators simply rig up the price so that they can get credit of mark to market which gets adjusted in the margin account.
The important conclusion that can be derived from the study is “The average value of all 233 companies’ lot size works out to Rs 5.19 lacs as against the defined default lot size value of Rs 2 lacs resulting into margin payment in excess of the default lot value which is against the basic premise of derivative scheme”.
If the margin required by the exchanges itself becomes double the default lot size value, then there is no doubt the volatility will rise.
The study also brings up a couple of issues that need to be closely looked at by the regulator. First, In order to check huge volatility, it is need of the hour to address this issue of lot sizes and values on a monthly basis i.e. adjustment of lot size on every settlement day. There has to be a mechanism whereby such adjustments should take place automatically at the end of the vallan and new lot sizes open in the new series.
Second, Margins need to be adjusted depending on the risk for the traders and can not remain at the levels of 60-70%.
The strong message that goes out to the retail investor is: “Instead of sticking their neck in derivatives which have become more risky products, investors should adjust the positions in the market to the extent of margins and re-adjust their investment to delivery”, says Mr. Kishor P Ostwal, CMD, CNI Research Ltd.
“However, the only concern which remains is that investors do not get the same depth in cash market which they get in futures. Thus the risk remains on either side”, he adds. In cash markets, the loss in jobbing will be lower because of low volumes, whereas in derivatives there are chances of more volatility and consequently a higher possibility of loss.
About CNI Research Ltd:
CNI Research Limited is a BSE Listed, leading Indian Research Company analysing and providing Data, Research Reports and Financial Information about Companies that are into the Small and Medium Cap category. CNI today has more than 40,000 subscribers from the retail Investors who rely on CNI for authentic and reliable information on Capital Markets to make their investment decisions. This information is provided to them online through their Financial Portal www.chamatcar.com .
CNI Research operates in the highly fragmented SME segment where information is hard to come by. Most of the research in India is done on large companies while there exists, practically no reliable information on smaller companies. CNI established in 2000 has successfully stepped into this void and established itself as a serious research house that sources hard to find data from these enterprises and does in-house research to come up with reports that are reliable and often predict the future happenings.
For more information, please contact:
Sunil Kumar Singh / Vinita Dhawan
Finesse PR
Telephones: +91-11-43046200 (30 lines)
Email: sunil ( @ ) finessepr dot com / Vinita ( @ ) finessepr dot com
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