How lockdown created absurdities in Indian securities markets

The coronavirus crisis and the national lockdown announced by Prime Minister Narendra Modi on March 24 have brought to the fore the digital divide within the Indian equity and commodity markets.

Right through this week while many brokers and a prominent brokers’ associations that have faced the brunt of the lockdown, have asked for equity and commodity markets to be closed, new-age brokerages that have a fully online business model and a young clientele have seen business grow by leaps and bounds.

Apart from essential services like food, vegetables healthcare and media, the banks and the equity, commodities and bond markets in India are also operational during the lockdown, while most other commercial and manufacturing activities have been shut for 21-day period.

The first problem for brokers have been getting to work, as the policemen on the streets have not been given clear instructions on allowing them to travel. Vijay Bhushan, president of the Association of National Stock Exchange Members of India, said in an interview with The Economic Times that many members of ANMI have complained of harassment by the police in Delhi, and his own staff members have been slapped on the way to work.

Bhushan, based in Delhi, also owns a petrol pump, and says, he has been using his pump owner’s ID to move around as fuel as an essential service is better understood by policemen than financial markets. But even that did not cut ice with some policemen on Wednesday, Bhushan said. Apart from commuting to work, Bhushan’s staff also needs to stay in contact with his older clients, most of who still operate through physical modes that need to be ohysically handed over – like cheques and intimation slips.

ANMI wrote to the markets regulator SEBI on March 25, asking it to close down the markets during the lockdown. Apart from brokers, stock exchange officials in Kolkata too faced commuting problems with the policemen, an official of Calcutta Stock Exchange said.

Commodity traders face a different kind of problem, apart from the harassment. While the spot markets for agri-commodities are closed, the futures markets for commodities are open on commodity bourses. Narinder Wadhwa, the president of the Commodity Participants Association of India, explained how prices of chaana (gram) have shot up on the futures markets, while there is no spot trade happening. “These are delivery based contracts – and how will the delivery happen when the contract expires, if the spot markets are still closed?”

Wadhwa batted for a shutdown of commodity exchanges if they close globally.

However at the other end of the spectrum would be discount brokerages like Zerodha or Upstox that seem to have made the most of the predicament of the smaller mom and pop brokerages. Upstox is set to report a 35% jump in new demat accounts opening for the Jan-March 2020 quarter, compared to October-December 2019. December 2019 was its best month ever when it had opened one lakh new demat accounts. Also number of orders in March has been 55% higher than February, said Ravi Kumar, co-founder of Upstox.

Kumar explained that as people found it difficult to operate through their usual brokers due to the lockdown and yet wanted to pick up cheap stocks as the indices plunged, enrolment of pure-play digital platforms like Upstox jumped. “We have a business continuity plan and our platform can operate even if none of our 200-member staff in Mumbai can go to office. This lockdown scenario is something we were fully prepared for,” Kumar said. He added that closing down markets in India now would be like downing a bank’s shutters, sending out a bad signal to the world.

Even larger brokerage houses that do both physical as well as digital, batted for keeping markets open. Lav Chaturvedi, CEO of Reliance Securities said that India has the best technology stack when it comes to digital markets consumers and the markets should continue as usual.

While access is one part of the problem, the lockdown has created other issues too. Quant and Algo-based trader Subhadip Nandy says the absence of volumes in the market is fairly notable. “We saw a stock like Indigo hitting the selling freeze in the morning and then the buying freeze in the evening. Something similar happened with Piramal. These kinds of wild fluctuations should not happen.”

Nandy added that there were anomalous situations on the Nifty index futures too, which indicate something is broken in the markets. He further shared how while trading on ATM options he saw rapidly moving prices flashing on his screen. “The algorithm based trading provides a kind of parity and stability. This anomalies indicates the algos have been switched off as brokers are sitting at home, unable or unwilling to go to work. In its absence, anyone with a large order is being able to move the market,” Nandy said.

Mumbai-based bonds trader Indradeep Khan said the bonds market is seeing a different problem as its participants are not as sophisticated as the equities market or the participants in terms of having backup strategies ready. “Because of Covid-19 people now want to hoard cash. Add to that aggressive selling of G-secs by foreign institutional investors, liquidity has dried up and corporate bonds are trading at weird levels.”

Markets commentator and chairman of Inditrade Capital Sudip Bandyopadhyay feels this is an unprecedented situation but closing down markets can be an option only if New York Stock Exchange and London Stock Exchange both close. “Otherwise if you close local markets with global markets operating, there will be huge trading in the grey markets, creating bigger problems.”