The government?s recent disclosures in the Rajya Sabha about the participation and concentration in equity and derivatives markets at the NSE have created consternation in a section of the media. This, however, may be an over-reaction.

First, the facts. In its answers the government disclosed, among other things, that while just below 31 lakh entities participated in the NSE equity market in the April to June 2010 period, half of all trading involved only 451 traders, with 156 of them

being proprietary accounts of brokerage houses. In the derivatives sections, the corresponding figures were 5.75 lakh, 106 and 58, respectively.

So what are we to make of this revelation? Clearly the Indian securities market cannot lay any claims to inclusion of greater society. That?s hardly news. Numerous reports, including the IIEF Household Savings and Investment survey in 2007 have estimated that financial markets involve less than 2% of households (that is direct investment in stocks, not trading) and the figure goes up to about 5% if one considers investment through mutual funds. The 31-lakh figure represents about 1-1.5% of the number of households in the country, so it is well within the ballpark. The ?exclusion? is voluntary and rational?uninformed trading is injurious to wealth. As Joseph Kennedy

famously observed, when shoeshine boys discuss stock markets, it is time to get out. If anything, one would perhaps expect a smaller fraction of owners to trade during a quarter.

But, of course, the real issue is the small number of entities constituting the bulk of trading. Should this be a concern? Maybe, because a small number of traders can increase chances of stock price manipulation. But concentration, in itself, is not proof of price rigging. Most major stocks that account for a whopping proportion of market trading are under considerable analyst scrutiny and foreign institutional investor and perhaps regulatory focus, for potential manipulators to get away undetected. The price-to-earnings ratios are not off the charts for

specific stocks and while market-wide bubbles are as likely here as anywhere else, there

is no evidence of rigging on

specific large stocks. We have come a long way since the

Harshad Mehta days.

Why then, do we have such a skewed distribution of traders? Retail traders giving way to institutional traders over time may well be interpreted as a sign of maturing markets. Individual investors are at a disadvantage, both in terms of information as well as in trading costs to institutions, and any close analysis of trading profits will show that over a period of time, institutions typically gain at the cost of retail traders. In a WSJ article in 2005, John Bogle, founder of Vanguard, had pointed out that the American household?s ownership share in stocks fell steadily from 91% in the 1950s to 32% by 2005 while the share of institutional ownership soared from 9% to 68%. This would naturally lead to more concentrated trading behaviour as well, particularly in terms of value. Institutional traders deal in larger order sizes and bring more information to the prices. Hardly a reason for concern in itself. In fact, the opposite could have signalled more froth in the market raising the chances of fads and bubbles. Is 451 a large enough number? There can always be a debate on that but try forming a cartel with a tenth of that number. And don?t forget the remaining 50% either. In markets, prices are usually set at the margin.

There is no denying that trading activity is getting concentrated. The share of the top 25 brokers in total trading, for instance, has risen steadily from 25% to 45% since 2001-02. But there is little to get alarmed about. For instance, the top 10 brokers at the NSE account for about 24% of all trades. The corresponding figure for the New York Stock Exchange?at over 39%?is more than 50% higher.

What may actually hint trouble is the high proportion of proprietary trading going on. It could be a sign?merely a possibility, not evidence?of ?front running?, that is brokers basing their own trades on the information implicit in their clients? orders. That?s bad news for their clients. But even if it is true, it neither distorts prices nor leads to systematic expropriation of retail traders.

Most studies conclude that the markets for large stocks

and equity futures in India are liquid in terms of immediacy, depth and resilience and it may not be unreasonable to assume that there is enough transparency and attention in the system to detect price manipulation in large stocks. As long as markets are liquid and efficient, little

else matters.

A vigilant Parliament is a great thing, but the government?s recent disclosures have little to lose sleep over.

The author teaches finance at the Indian School of Business, Hyderabad