Sucheta Dalal :Decoding Manic Monday: Was It A Scam Or Panic?
Sucheta Dalal

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Decoding Manic Monday: Was It A Scam Or Panic?  

May 24, 2004

Clearly, there was an irrational reaction on Manic Monday, but it seems fairly certain that it wasn't triggered by an organised bunch of bears aiming to profit from the pandemonium


Was the extraordinary and inexplicable fall in stock prices on Monday, March 17, the handiwork of a bear cartel? Or did the automated trading system exacerbate investor panic by allowing thousands of investors across the country to participate in an illogical sell-off?

There are no clear answers as yet. Over the next few months, regulators will study illogical market behaviour on Manic Monday to try and figure out if anything could have calmed the markets to avoid such a meltdown. What is already clear is that no identifiable bear cartel (except in the minds of some politicians) sold in any sustained manner to spread terror.

Take a look at some facts. The first 10% fall on May 17 occurred just 10 minutes after trading started with very low volumes. And the second circuit break was hit in just about five minutes after markets reopened and stock prices dived again.

Stock exchange officials have examined and re-examined trading data for that day, but cannot identify a clear source of panic, either in the cash market or in derivatives. Clearly, there was an irrational reaction on Manic Monday, but it seems fairly certain that it wasn’t triggered by an organised bunch of bears aiming to profit from the pandemonium.

Clearly, there was an irrational reaction on Manic Monday, but it seems fairly certain that it wasn’t triggered by an organised bunch of bears aiming to profit from the pandemonium

Let’s now step back to the election results. They fooled the best political strategists, pundits, pollsters and punters. Yet, the stock market reacted positively to the prospect of a stable, Congress-led government on May 13. It only panicked on Friday the 14th, on hearing the Left parties policy pronouncements. A weekend of 24-hour television broke the equanimity of investors after watching the “communists” posturing on policy.

Yet, the rumour mills of Delhi propound the theory of a bear cartel. This comes mainly from political lightweights fixated on the past, when their political bosses danced to the tune of stock market bulls such as Harshad Mehta and Ketan Parekh. They find it incomprehensible that a big market move is not dictated by a shady cartel and are unaware of how the T+2 rolling settlement and dynamic margining system works.

Even without going into those details, let’s look at publicly available information. First, the BJP-led coalition did not expect to lose and the Congress was surprised at its success. Neither side nor its supporters would have dared to take bullish or bearish market positions before the results on May 13. Although the second exit polls did show the ruling coalition on a decline, nobody, to my recollection, predicted a non-BJP-led alternative in power. Even the Satta Bazaar (unofficial betting market) got it wrong this time and bookies around the country have defaulted on payments after betting on a BJP-led formation.

The idea of a politically-motivated bear cartel seems fanciful; in fact, my sources say that punters, investors and politicians close to the BJP lost significant sums of money, especially on their investments in bank and public sector stocks. So, the Delhi grapevine has lined up another usual suspect — a large Mumbai-based corporate house attributed with prescience and omnipresence. One version circulating in cyberspace says it ganged up with a regional political party and some hedge funds to pressure the government over the composition of the ruling coalition.

This sounds like a good story, but the numbers don’t back it. The markets fell almost 15% on Monday on very thin trading. The only possibility is that large trades were entered into the system before trading commenced to trigger mad panic among day-traders and set the stage for an unexpected meltdown.

Stock exchange sources are emphatic that there is no evidence of such activity. Early trades are not linked to specific groups or hedge funds. If anything, they complained about the lack of liquidity preventing them from participating in the frenzied decline on Monday morning.

Having said that, something unusual did happen on May 14 and 17. The fall on both days was significantly higher than had been seen after the Pokhran blasts of May 1998 or after the HD Deve Gowda government was pulled down in March 1997. What was different this time?

For one, there is the large presence of Foreign Institutional Investors (FIIs) who lead a curiously nebulous existence. This tribe includes volatile hedge funds and shadowy investors who buy through participatory notes issued abroad. Very little is known of their exact trades, but they wield a big influence on market activity. On Manic Monday, FIIs did little trading until the second circuit break. But statistics show a massive Rs 1,263 crore of purchases and Rs 1,299 crore of sales, yielding a modest net sale of Rs 63.6 crore in the cash segment. In derivatives, they traded less, but sold more. Net sales were Rs 128 crore after purchasing stock derivatives worth Rs 362 crore and selling Rs 490 crore.

The question that needs to be asked is: What scrips are these FIIs churning in such large numbers on a day the market was down by more than 560 points? What is the precise timing of their sales and purchases during a long trading session of five-and-a-half hours? The automated trading system ensures that nobody knows what they do.

This is in direct contrast to the Harshad Mehta- and Ketan Parekh-led bull runs, where both operators needed the market to know of their trades (probably after the initial accumulation of stocks) in order to create a following among small punters and fuel the bull run.

Not so with FII trades. Their large daily volumes have no discernable pattern, their activities are discreet and there is only a curious opaqueness about their activity and often even the beneficial owners behind their trades. Yet, one of the drivers of the downward frenzy on Monday was the fear that the communist rhetoric would drive FIIs away. Clearly, we need much more light on the biggest market movers — the FIIs — in the overall interest of a healthy capital market.

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-- Sucheta Dalal