A sharp rise in the lot value and an increase in derivatives margins are considered to be the main reasons for the huge volatility in the share market over the last few days. The margin system has also helped many traders and operators to use it to their advantage. When markets are on the rise, operators simply rig up the price so that they can get credit of mark to the market which gets adjusted in the margin account, said CNI Research, a research company specialising in small and mid-cap companies.
Generally, the value of the lot size is, by default, decided to be around Rs 2 lakh per lot. On February 27 2009, the day the new lot size was implemented, 194 companies were around the Rs 2-lakh value size and 23 companies were above the Rs 4-lakh bracket (which may be attributed to the rise in share prices rose in these scrips, after the announcement of the date of implementation). The firm has done a study of 233 scrips in the F&O segment.
Based on the procured data, it was found that as on May 22, 2009, only 59 companies remained in the bracket of Rs 2 lakh- Rs 4 lakh, compared to 194 companies earlier; 108 companies came in the bracket of Rs 4 lakh- Rs 6 lakh, as against 23 before; 65 companies even crossed the bracket of Rs 6 lakh and above, while there were no such companies earlier on.
One of the most important conclusions drawn from the study is that the average value of all 233 companies? lot size works out to Rs 5.19 lakh, as against the defined default lot size value of Rs 2 lakh. This results in a margin payment in excess of the default lot value, which is against the basic premise of derivative scheme.
The margin required by the exchanges themselves becomes double the default lot size value, thus resulting in a volatility rise. The study also brings up a couple of issues that need to be closely looked at by the regulator. Firstly, in order to check the huge volatility, addressing the issue of lot sizes and values on a monthly basis, that is, the adjustment of lot size on every settlement day is required. There has to be a mechanism through which such adjustments should take place automatically at the end of the vallan and new lot sizes open in the new series. Secondly, margins need to be adjusted, depending on the risk for the traders and can not remain at the levels of 60-70%.
The strong message that goes out to the retail investor is, ?Instead of sticking their neck in derivatives, which have become more risky products, investors should adjust the positions in the market to the extent of margins and re-adjust their investment to delivery?, says Kishor P Ostwal, CMD, CNI Research. However, a concern which remains is that investors do not get the same depth in cash markets, which they get in futures. Thus the risk remains on either side, he added.
In cash markets, the loss in jobbing will be lower because of low volumes, whereas in derivatives there are chances of more volatility and consequently a higher possibility of loss, the study added.
Movers and shakers
•The value of the lot size is, by default, decided to be around Rs 2 lakh per lot
•On Feb 27, 194 firms were around the Rs 2-lakh value size and 23 companies were above the Rs 4-lakh bracket
•On May 22, 59 firms remained in the bracket of Rs 2 lakh- Rs 4 lakh, 108 firms came in the bracket of Rs 4 lakh- Rs 6 lakh, and 65 firms crossed the bracket of Rs 6 lakh and above
•The average value of all 233 companies? lot size works out to Rs 5.19 lakh, as against the defined default lot size value of Rs 2 lakh
•Margins need to be adjusted, depending on the risk for the traders and can not remain at the levels of 60-70%
