Introduction of Call Aution for Opening price

As of now Opening prices in Indian Market is calculated as first trade on the exchange. The Exchange is unbiased about the price at which it is traded nor it is unbiased about the trade quantity. The opening price calculated necessarily does not denote the fair price because

a) The opening price can be a fair opening price or it can be an outlier on either side.

b) The quantity traded on opening price is immaterial i.e it can be of 1 share or it can be a stake it the company.

c) Such opening price do not give fair idea about the opening price and there is huge volatility at the open.

d) Many players do not consider opening price as price to reckon as it is just one trade.

Theoretically opening price should reflect the new price which is a consensus price after taking into account all the overnight Informational change and Liquidity needs (Fama). Opening price should be able to clear all accumulated overnight market orders and limit orders which are at or above discovered opening price for buying and limit orders which are at or below discovered opening price for selling.

Such opening price is a good price to read and more reliable. Also it will give better perception about the market. Also equilibrium opening price (As referred by SEBI) may have less volatility and will pass the test of reliability.

The answer to such theoretical opening price is call auction for opening price (commonly called as Pre opening session). SEBI and Exchanges have agreed to start pre - opening session which is a welcome move. This will reduce volatility at the open and also make opening price readable. Such problem will definitely reduce the problem of outliers.

The Salient feature of such Pre-opening session will be as follows

a) All market orders and limit order coming in computation of Opening price will be executed at a single price.

b) It will definitely be a better price to read.

c) It will reduce volatility at the open

d) It will give better signals about the market.

e) It will help in interpretation of Informational change which will reduce noise trading (Fama) at the open.

f) Retail Investors can rely on discovered opening price.

We also need Closing call auction to discover Closing price, which is a long way to go(As Closing price is now calculated as VWAP price). I guess to bring Call closing auction will be difficult in near future as Derivative price discovery is done on closing price and till they are stock settled that wont be tweaked, but at least we have Call auction for opening session.

There was Pre opening session and closing session in India before 12 years on NSE, but it was done away with. (I guess the problem was with price discovery algorithm and lately because of VWAP price at close).I hope we won't face same problems.

Also Recent guidelines on Call auction says that Price discovery process will give priority to Limit Orders and than to market orders. Logically it should be priority to market orders(ATO : At the open) and the to limit orders. I am sure SEBI and Exchange has reason behind this.

I welcome your critical comments and suggestions

Listing of NSE Nifty of CME

NSE had entered in pact with CME to list Nifty futures on CME and NSE can list futures on DJIA and S&P 500. CME is about to list NSE nifty and start trading on it from 17th July, 2010.

The Salient features of Listing are

a) Foreign Investors and NRI can take position on Nifty using CME platform.
b) It would mean you can trade on Nifty for about 23 hours in a day.
c) The listed NIFTY will be Dollar denominated, hence Foreign Investors need not hedge Rupee Exposure.
d) The Contract size of trading is about 10500 $ and 52500 $. (5 lakhs and 25 Lakhs)
e) The contract size of SGX nifty is also the same as the size on Lower denomination value futures on CME.
f) You can offset CME position on SGX and vice versa. It means the trader can take position in SGX and when SGX is closed he can simply close the position on CME.
g) There is no transaction charge on Nifty Futures on CME up to December, 2010.
h) Many FII and Hedge funds and unregulated entities need not register itself in India and can take position on Nifty.
i) The will be more arbitrage opportunities to global investors as same product is listed in different geographies.
j) They don’t have to pay STT in India which is a major transaction cost in Nifty trades done on NSE.
k) SGX has already signed a contract with NSE to provide Nifty Options, Hence Nifty option will also be traded globally.


Is there any concern of worry?
a) Price discovery will be better if the product is globalised. Nifty will also be looked upon as investment vehicle if there is sufficient interest, Volumes and Open Interest from other geographies.
b) Global Player can trade in Nifty anytime
c) I also perceive that combined Nifty volumes of all geographies will increase but the share of nifty trading in Indian Bourse will fall not only in percentile terms but also in Absolute terms. Because global player will prefer trading in SGX and CME as it will have lesser transaction cost and No STT and No Rupee Exposure.
d) Are many Indian Players equipped and have necessary Logistics and Infrastructure to trade in Global Markets. I guess the answer is No; Most of the Indian Brokerages, Banks and Prop Desk are not equipped. Nor do they possess the required Skill set also they are miniscule in size on global scale.  Also Indian Laws are tough for allow Indian Companies and Brokers to trade on Global Exchanges.
e) There is nothing in store for General Investor as he was always a price taker, but we will have to see Lead-Lag behavior of Nifty between Indian Exchange and Foreign Bourse.
f) 40% of Volume on NSE derivatives is for Nifty Options. As and when options will be traded on SGX we may see big shift in open Interests.


Will NSE lose its Market Share?
Yes NSE will lose volume to Foreign Bourse, but they will compensate fall in Transaction charges with huge license fee and charges from Listing of DJIA and S & P 500.



What will government lose?
Definitely STT, huge STT will be lost by government with shift in volumes, but Government may take solace in Lesser Tax litigation and less entry of unregulated entities.

Introduction of Physical Settlement in Derivatives Segment

SEBI chairman yesterday came and said about the introduction of Physical settlement in Derivatives markets in India. It is a welcome move for the market.

Such move will change the paradigm of Trading and Arbitrage and the players will have to get accustomed to new settlement procedure.

It needs to be seen as to how SEBI comes up with the guidelines on Physical settlement because Settlement of Derivatives segment is done by Clearing members and not by trading members, whereas All brokers are also effectively clearing members of the exchange. What about Professional Clearing members ? Does it mean that SEBI will allowing transferring Trading members position on Brokers Capital market books/ Custodian on Settlement days ? What about exercise of American Options ?

Also Will SEBI give opportunity to player to close trades after the assignment of options ?

What About STT ? What rate would that be charged ?

It will help arbitrageurs to not concentrate on squaring of the position but can concentrate on creating new positions. I guess spreads will come down and backwardation will not be high.

I hope new rules not only help institutional players but are Investors friendly

Merger of Samruddhi Cement with Ultratech Cement

Honourable high court of Mumbai & Gujarat have given their permission of merger between Ultratech Cement and Samruddhi Cement. Samruddhi cement was recently de-merged from Grasim for pure cement play and Samruddhi is further merged with Ultratech cement (which also belongs to Birla group) for consolidation of cement business.

Since courts have given permission for merger, The ex date of merger should be announced in few days. The merger ration is 4:7 ie 4 shares of Ultratech cement for every 7 shares of Samruddhi cement.

There lies arbitrage opportunity in the merger process. Since samruddhi will be delisted as it will be merger with Ultratech cement, you can sell middle month and far month options. also there lies opportunity in carry trades.

Buy Samruddhi cement (CMP Rs 476/- * 7 shares)           3332/-

Sell Ultracemco futures (CMP Rs 853/- * 4 shares)           3412/-

Net gain                                                                                80/-

The amt will be released before the expiry of august contract (Maybe the price discovery will be happen before Ex date). there fore the returns on Investments will be 2.5 % for 1 months . 

Scheme of Arrangement between Jagran Prakasan & Mid - Day

Midday has sold its print business to Jagran Prakashan. The pay off is in form of Shares of Jagran prakshan. The Ratio of Shares to be issued is 2 shares of Jagran for every 7 Shares of Mid - Day. Along with that the share holder will own shares of Mid -day which will have is Radio business & License.

There is an opportunity to be made in this deal. The shares holders of Miday will get 2 shares of Jagran for every 7 shares along with shareholding in midday. The residual value of Midday after demerger of it Print business should be between 8 - 10 Rs. It is worthy to buy midday at this price for a better gain.

The valuation of the deal is as follows

CMP of Mid day             30.35        cost of 7sh   = 212.45

CMP of Jagran              111.40        cost of 2sh   = 222.80

Net pay off                                                              -10.80

Residual value of Midday   8.00         Price of 7sh = -56.00   

Total Pay off                                                            -66.80

It means if we buy Mid day today , the net payoff is Rs 66.80 if we value residual share of Miday at Rs 8/-.

If you are bullish on jagran buy Mid-day. Also there is a natural hedge in case of fall in price of Jagran.

The Caveats to this opportunity are

a) The Deal may take up to 6 months to conclude because of getting different approvals from government agencies.

b) There is a risk that price of Jagran will fall, as well as opportunity that it will go up.

c) Radio business of Midday is loss making and it requires huge capex.