Responses from my readers...

Guys its good see the responses from you guys for ban on short selling. Good way of knowledge sharing...

Pradeep's Response

I don’t think short selling is playing a major role in fall of market…I don’t know the exact volume but some where I read that short selling is very small fraction of total traded volume

The major factor for current market fall is FII selling , last 4 month they have withdrawn more than $10Bn from the market due to obvious reason i.e. credit crisis and US Recession.

Even though RBI and Govt have taken various positive step like PN notes relaxation, increase ECB limit , increase Debt instrument investment limit by FII etc,

So the main reason for falling market is Global crisis in world market which have proven the theory of decoupling wrong.

Regards,

Pradeep C.


Purnendu's Response...

Hi,

Short selling can never be the cause of market falling to that much amount. An important point that you missed out in your explanation was that every brokerage firm charge the trader a heavy interest rate on its open position for short selling. This makes sure that traders can only short sell particular stock for an average of 4-5 days only. After that they have to cover their open positions by buying back the stock. An excellent tool for trading in short selling is “Short Interest Ratio”. This ratio is nothing but short interest paid for a particular stock in an exchange divided by the volume of stock traded for the stock for a particular day. If this ratio is high then there lies an opportunity for traders to buy shares of that particular stock since higher short interest ratio means that there are huge no of traders who have already short sell that stock and will cover their positions in a few days time. This will cause the demand for that particular stock to increase and subsequently the price of the stock will also increase. Now, the traders who have already bought shares for that particular stock can sell their shares at higher price and book profit for themselves.

Regards,

Purnendu Dey


Udit's Response...

I too don’t think that ban on short selling is the cause of the current meltdown in the Indian markets. It is just that the short selling is taken as a scapegoat for current turmoil. To take an example it may be 28th or 30th of this month that ban on short selling of the 19 stocks in US market would be lifted, however during this period those 19 stocks were the most beaten down stocks, as mentioned by Naveen that short selling provides a floor price to the stock.

Moreover, the problem in Indian market is that the short selling is not liberalized. What is the problem of lending and borrowing? However it effects because in India the period is just of 7 days, which should be of at least of a month or three.

I argue that if one is to disclose its short position before placing an order, what’s the point in short selling then anyone can run above him and make easy money. So a sane person will not short sell if the entire market knows his/her position.

Hence, I just want to drive in the point that short selling should not be banned it should be regulated and liberalized. Also there should be a delivery settlement in the F & O segment to augment it.

Thanks and Regards,

Udit Mehra


My reply:

I dont have to say anything as these are individual perceptions. But I have given enough data(from business standard) how FIIs are lending for short selling.

Thanks guys..