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The evolution of the Indian capital markets has been accompanied by a series of pioneering moments:
Era of dematerialisation
This was our first roadshow as brokers, which targeted market intermediaries, spearheaded the era of dematerialisation, revolutionising securities handling, and storage.
Digital trading innovations
Executing the first-ever online derivative trade marked a monumental leap, propelling markets into the digital age. It connected swathes of investors across nations, making markets more inclusive.
Rolling settlements
Phased introduction of rolling settlements was critical in reducing systemic risk and enhancing market efficiency.
These milestones were not mere changes but reformatory evolutions that paved the way for robust market systems and efficiency in market transactions, making markets deep and liquid. The critical transformation the market went through includes:
Enhanced access to markets
Providing investors unobstructed access to various asset classes. It includes investors, including global investors, looking to diversify their holdings, follow India's growth story, and appropriately manage portfolio risks.
Stringent risk management
Developing a robust risk management framework that has evolved to mitigate the risk of contagions is pivotal in safeguarding market integrity without compromising market efficiency or the cost of participation. One can safely mention that regulators and Market Infrastructure Institutions (MII) have mastered the same.
Capital flows across borders
Despite the instability in the global markets and rapidly changing foreign investor sentiments, regulatory supervision and the digital ecosystem have evolved these years to ensure smooth capital movement across asset classes to maintain market dynamism and liquidity.
Consolidating the capital market segments, including derivatives under Sebi in 2015, helped streamline processes and policies, setting a solid foundation for today's advancements. For example, the unified clearing mechanism ensured efficiency in capital utilisation across the allowed segments. The risk management is entirely ringfenced.
The shift to T+0 has met with mixed reactions and holds immense potential to enhance market operations. Here's why it can potentially improve the efficiency in the cash markets to the next level.
Let us explore a detailed scenario that illustrates the arbitrage opportunities arising from T+0 settlements that run alongside the T+1 segment in the cash market.
Setting the context for an arbitrager
With T+0, the immediacy of trade settlements significantly changes the liquidity dynamics.
Consider investors with two different participation objectives:
- Investor A wishes to sell shares of stock X immediately at the current market price to capitalise on her recent gains.
- Investor B is interested in purchasing stock X but prefers the traditional T+1 settlement due to cash flow considerations.
- Investor A sells her shares at ₹99.985 in the T+0 market, seeking immediate liquidity.
- Investor B agrees to buy at ₹100.015 but on a T+1 basis, benefiting from a slight price advantage and deferred payment.
- Arbitrageur (Investor C) buys from A at ₹99.985 and sells to B at ₹100.015, earning a spread of ₹0.030 per share - leveraging on the overnight rates of 7.25/7.50%, i.e., 2 bps per day.
- Investor A receives funds immediately, achieving its goal of quick liquidity.
- Investor B benefits from buying at a slightly higher price but with the advantage of deferred payment.
- Investor C profits from the price differential (3 bps), effectively leveraging the day's interest rate (2 bps), which might be about two basis points daily, translating to a significant advantage over large volumes.
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Subscribe to The Economic Times Prime and read the ET ePaper online.