SEBI via its latest circular today has prohibited naked short selling and introduced a new framework that prohibits institutional investors from engaging in day trading. SEBI has emphasized that naked short selling won’t be allowed in the Indian securities market. It mandates all investors to fulfill their obligation of delivering securities during settlement.
Institutional investors are barred from day trading or squaring off intra-day transactions. Their transactions will be aggregated at the custodians’ level and obligations must be met on a gross basis. Despite this, custodians will settle deliveries on a net basis with stock exchanges.
SEBI may periodically review the list of eligible stocks for short selling. Institutional investors need to confirm if a trade is a short sale upfront, while retail investors can make this disclosure by the end of the trading day.
Brokers are now required to collect and upload scrip-wise short sell positions on exchanges before the next trading day. Stock exchanges, in turn, will consolidate this information on a weekly basis and make it public.
How do you see this move impacting the markets next week?
Can we(retail) short stock in intraday and square-off at EOD? What are the implications? I was thinking to create a new intraday shorting strategy but now I am unsure if I can do that and is there something which is needed to be kept in mind? @iamshrimohan
@GalaticX yes agree to that! Short selling is a way to of clean up but unfortunately in a developing market like India, if not regulated can bring in disasters! Not every company can have an AJ to fight against the bear cartel (Those who know, know! )
However the implication of this is just reporting from the Broker’s perspective, one additional step. Nothing impacting the client. Institutions were using this when there was T+2 settlement in place. Short on Monday, Borrow from SLBM on Tuesday (SLBM has T+1 settlement) and Wednesday, fulfil the obligation. This is not the case now!
@t7support yes, post sept 2020, PDs mainly do arbitrage of Cash and Future, its them who provide a liquidity in the market.
@sv28 Apologies, for missing out on this. Yes u can, no major from the client perspective. Its mainly on broker, who needs to report any naked short positions (which by default gets reported to them via auction but they are planning to introduce a new reporting for this as well).
@sv28 Yes. However, an edge case here it may also happen if the security hit circuit. For example you short ABC and the security gets locked in upper circuit.
@PravinJ@iamshrimohan can you supplement with some data to help us understand how it will impact liquidity?
“No institutional investor shall be allowed to do day trading i.e., square-offtheir transactions intra-day. In other words, all transactions would begrossed for institutional investors at the custodians’ level and the institutions would be required to fulfill their obligations on a gross basis.The custodians, however, would continue to settle their deliveries on a netbasis with the stock exchanges”Line item 4.
Before this circular - what percentage of DII or FII were doing intraday trading? Of the total volumes we see in FnO - what % comes from institutions?
He did not mention Institutional DII, FII speculation. The current SEBI circular does not affect the prop desk and PMS services - please correct me if I am wrong.
The spikes you see are due to a lack of liquidity not due to the abundance. If the volume of speculation goes down - the freak trades will go up.
Also the bid/ask spread will go up if liquidity goes down - hence more slippage.
I requested data from @PravinJ to understand on a percentage level how much of the FnO volume comes from the institutional desk. If It is more than 30%, then even the backtest data for the last 5 years will become useless.
If you are backtesting theta decay strategies with historical option data the dynamics could change with nature of orders (manual to algo), participant change (retail or institutional) etc. If you are backtesting on spot based on some math model it is unlikely to be affected.
Let us try to brainstorm and explore the possibilities here.
Assume there is an Indian listed company “ADN” that trades at 4200 rupees. And then there is a US-based research company “HIN” that feels ADN has done stock manipulations or fraud.
HIN would like to go short on ADN, the available choices with them are
Buy any PUT options below 4200.
Sell any call options (ITM, ATM or OTM) based on their confidence.
Get into a short position of ADN by SLBM (intraday or positional).
Short sell ADN ADR in US.
Depending on the credibility of the research firm or the public’s awareness of the fraud done by ADN, there is a high possibility that the share price could fall from 4200 to say 1000.
If SEBI intends to restrict further activities like these, they have to work on points 1 & 2. If the current scope of the document is just on EQ short-selling ban (intraday of point 3) - it will not have real impact.
Point 4, I believe is above SEBI’s jurisdiction.
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