Data from the National Stock Exchange (NSE) show the average monthly traded quantity under SLB has rocketed 20-fold in July-August compared with the first six months of 2010.
Interest in the stock lending and borrowing (SLB) scheme has surged sharply among institutional investors in the last three months due to a rise in reverse arbitrage opportunities between the cash and the derivatives segments.
Data from the National Stock Exchange (NSE) show the average monthly traded quantity under SLB has rocketed 20-fold in July-August compared with the first six months of 2010.
The spike came after NSE’s clearing subsidiary extended the tenure from 30 days to 12 months.
Compared with 4.17 lakh shares lent/borrowed in the first six months this year, there were 11.41 lakh shares lent/borrowed in July through 186 transactions and 13.79 lakh through 138 transactions in August.
And in the seven sessions in September so far, the segment has literally boomed: as many as 11.44 lakh shares have already been lent/borrowed through 98 transactions.
Most of the trades in September have been in the futures & options shares such as ICICI Bank, Ultratech Cement, Mahindra & Mahindra, Tata Steel and HDFC Bank, where their futures prices are trading at discount to the cash market prices.
Credit for this renewed interest in the once-dying segment goes to the Securities and Exchange Board of India (Sebi), say marketmen.
The regulator had in January this year allowed extension of tenure under SLB from 30 days to 12 months as volumes stayed non-existent since the scheme was launched in April 2008.
Here’s how bad it was: Just 4.68 lakh shares were lent/borrowed though 80 transactions in whole of calendar year 2009.
Experts say SLB adoption has increased due to reverse arbitrage opportunities.
“The trades in SLB are opportunity-driven at the moment. People who find worthwhile spreads between futures and cash market prices engage in reverse arbitrage through this mechanism,” said Manish Shah, associate director, equity and derivatives (advisory/products), at Motilal Oswal Financial Services.
Under reverse arbitrage, an investor sells in the cash market and buys the same share in the futures segment. On the other hand, a plain arbitrage opportunity arises when there is a price difference in the same share on different exchanges.
“We have been pushing this (SLB) for a long time now. Institutional investors like mutual funds have it as an alternative in their new schemes, to take advantage of the reverse arbitrage opportunities,” said Yogesh Radke, head of quantitative research at Edelweiss Securities.
Experts said interest would rise manifold if SLB is extended to non-derivatives segment shares also.
“A person taking directional short call can very well use the F&O where liquidity is high and is simpler. In non-F&O scrips, it would be more useful, but liquidity would be an issue,” said Motilal’s Shah, alluding to the inefficiency in market making in the cash segment, where the number of buyers and sellers are not enough to let transactions take place in heavy volumes.
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