Spicing up a dull market

It was a curious coincidence that baffled market observers. In the three days, following B.K. Modi’s announcement on January 29 of his intention to buy the crisis-ridden Satyam Computer Services, the share price of Spice Communications shot from Rs 26.35 to Rs 86, rising by more than 200 per cent. What was the connection? What had Spice to do with Modi? Hadn’t he sold it to Idea around mid-2008?

But there were other low-priced, low-volume stocks that were in a spate around the same time. Wire and Wireless India, a part of the Zee Group, jumped almost 60 per cent in a single trading session. Real estate firm Orbit Corporation rose 40 per cent in a single day. Dish TV and shipping firm Mercator Lines, too, saw their stock prices jump 20 per cent in a single day!

So, why were these stocks showing such exuberance? “It is just manipulation. With only 1 per cent of floating stock (of Spice Communications) in the market, it is very easy for someone to jack up the stock price,” says the head of research of a broking firm, requesting anonymity. The regulator, SEBI, according to him, would not be too keen to take action in such cases as the public holding is just one per cent. In such a situation, stock exchanges should intervene and disallow derivatives in companies that have low floating stocks.

But a more plausible explanation for the sudden bullishness in several stock counters could be short covering (buying shares that had been sold earlier) by traders ahead of the March deadline when some 15 stocks will cease to trade in the futures & options (F&O) segment due to low trading volumes. In fact, all the stocks mentioned here are traded in the F&O segment on the BSE or the NSE or on both.

Another factor that may have contributed to the rise in the prices of many stocks is the upward revision in the lot sizes of derivatives contracts from March onwards in order to bring the value of a lot to Rs 2 lakh or close to that level, specified by SEBI. Given the incessant fall in the stock prices since 2008, the value of a single lot of many derivatives contracts has fallen to Rs 50,000 or below. The only way the value of a lot can be restored to the Rs 2 lakh level is by increasing the number of shares in a contract. This will, on average, increase the lot size of contracts by 3-4 times. In October 2006, the lot sizes had to be reduced due to rising stock prices.

“We have been asking our clients to either square-off their positions in such stock futures or pay additional margins,” says a dealer with a domestic broking firm. For instance, the lot size in the Wire and Wireless contract will increase from 3,150 shares to 25,200 shares for the March contract. This means that investors who continue to hold the contract for March will have to pay more margin money for the additional shares.