August 30, 2017

Brief analysis of the Algo Trading report of NIFM released by finance ministry this week

My brief analysis of the Algo--and High Frequency--Trading report submitted by NIFM (National Institute of Financial Management) to economic affairs department of the finance ministry:

Everyone appears to be concerned about the mis-use of algo trading and high frequency trading (HFT) in the domestic equity market. But the fact that algo trading and HFT is happening in a big way is exactly what is contributing to the extremely high trading turnover (particularly in F&O) and which takes India to the top 2-3 equity markets by size of trading volumes.

Some of the concerns surrounding algo trading such as front-running institutional orders (particularly of mutual funds) are legitimate. But these can only be addressed by active regulatory surveillance and not through restrictions (like time resting, etc) on the contours of algo trading.

Competition between NSE & BSE should not be allowed to stay unhealthy whereby the smaller-of-the-two-stock-exchanges lobbies with regulators and governemnt for killing or curbing of new technologies in trading under the pretext of investor protection but with real intention of strangling the growth of the larger stock exchange.

New technologies can not be wished away.  And, it will inevitable drive volumes up. The solution is to keep upgrading surveillance technology to ensure it stays high-speed, real-time and intelligently-programmed. This can safeguard the interests of genuine medium-to-long term investors (institutional, retail) and also genuine traders do not get hurt by manipulative algorithms by other traders.
========================================================

The NISM report explains how front running can take place using algo trading:
"...Mutual funds are worst hit Mutual funds (mostly active funds) that do a lot of large block trading and tend to trade urgently or predictably are worst hit. Since mutual funds trade in large quantities, there are possibilities where other HFT algorithms sniff these large orders and capitalize on this information, thus front-running large orders and manipulating markets in the process..."
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Liquid funds turn less volatile in last 3 months, volatility likely to rise by end of yr

A trend story on liquid funds I did for the news orgn I work for currently:

http://www.cogencis.com/differentiators/ShareNews.aspx?newsId=1003654



[C] Liquid funds turn less volatile last 3 mo, likely to rise end of yr
Cogencis, Monday, Aug 28

    By Rajesh Gajra
    NEW DELHI - Investors in liquid schemes of mutual funds have seen returns
become steady in the last three months, after having seen highly volatile
returns in the preceding six months.
    In the last three months, liquid funds’ annualized returns have ranged
between 6.48% and 6.72%, while the preceding six months had seen it fluctuate
between a lower 6.00 per cent and a higher 7.08%.
    Fund managers expect lower volatility to continue for a couple of months
but expect a rise in it towards the end of the current calendar supply due to
liquidity pinch.
    In the current month, as of Wednesday, the median one month return of 45
liquid funds was 0.55%, while at the end of previous month and at the end of
June it was 0.56% and 0.54% respectively, an analysis of data from Value
Research's portal showed.
    This narrow band of 0.54-0.56% in the returns stood in sharp contrast to
the wide variance in returns seen from last November to end of May this year
when the median one-month return fluctuated between 0.50% and 0.59% and in
swings.
    For instance, the median one-month return fell sharply to 0.50% at end of
April from 0.58% a month ago, only to rise significantly to 0.59% at end of
May.
    Only returns from direct plans of the liquid funds under review were
considered.

LIQUIDITY SURPLUS
    "Abundant liquidity in the system is leading to low volatility in money
market rates (yields)," said Puneet Pal, head of fixed income at BNP Paribas
Mutual Fund.
    "Currently, there is a 2.5-trln-rupee liquidity in the money market,"
according to Deepak Agarwal, fund manager-debt at Kotak Mutual Fund.
    The last three months has seen this surplus range between 2.5 trln rupees
and 3 trln rupees. Much of it is the money which has continued to remain in
the banking system after demonetisation.
    Post-demonetisation, while the Reserve Bank of India has been active in
sucking out liquidity through open market operations like reverse repo
auctions, the intensity has varied from month to month.
    On the one hand the RBI has been conducting open market operations to
suck out liquidity over the past several months, since April it has also been
intervening in the forex market by buying dollars to rein in the
strengthening rupee and in the process has added to the liquidity in the
system, said Agarwal.
    Liquid funds invest in debt paper of residual maturity necessarily less
than 91 days, as mandated by regulations. This is primarily through
investments in money market instruments where the maturity is less than 91
days.
    Generally, going by recent data, liquid funds invest 45-50% in commercial
papers, 15-20% in sovereign debt paper such as treasury bills and cash
management bills, and 10-15% each in bank certificate of deposits and
collateralised borrowing and lending obligation instruments.
    Other debt schemes of mutual funds like ultra short term debt funds,
short term debt funds and dynamic bond funds also invest a portion of their
assets in money market instruments. Further, a part of the debt portion of
balanced funds also gets invested in this segment.
    According to Securities and Exchange Board of India data total money
market investments by all mutual fund schemes was to the tune of 4.77 trln
rupees as of the end of July. But Association of Mutual Funds in India data showed the assets under
liquid funds to be 3.23 trln rupees, indicating a 30% exposure to money
market instruments being by funds other than liquid funds.
    Unlike liquid funds, the other funds can dynamically increase or decrease
their exposure to less-than-91-day debt paper based on their risk-return
assessment. But when they do chase money market instruments it tends to
reduce yields. Liquid funds’ returns get hit when this happens.

NEXT FEW MONTHS
    “I don't see any reason why money market rates should go up dramatically
in the next couple of months as liquidity conditions are likely to continue,”
said Pal.
    But from October onwards the festive season will lead to a temporary
drawdown on liquidity. And, given that one doesn't expect RBI to cut repo
rate any more till at least the end of the calendar, it might put some upward
pressure on money market rates, according to Pal.
    Further, goods and services tax-driven increase in working capital
requirements of manufacturing companies is likely to lead to a sharp increase
in the issuances of short-term commercial paper of 2-3 month duration,
according to credit rating agency, India Ratings.
    Since these commercial papers are likely to have tenures of less than 91
days, it could drive up the yields of liquid funds’ portfolios.
    According to Agarwal, seven-day borrowings by non-banking financing
companies increase during times of equity initial public offers and any
significant IPO or IPOs in the coming months could pep up the short term
money market rates.
    Another factor impacting liquid funds is assets growth which has seen a
decline in the last three months. Liquid funds recorded net outflows of
646.92 bln rupees in May, 127.39 bln rupees in June and 195.11 bln rupees in
July, against net inflows of 994.03 bln rupees in April.
    Some investor money has shifted from liquid funds to ultra short—and
short—term debt funds in search for higher returns, said Murthy Nagarajan,
head of fixed income at Tata Mutual Fund.
    When investor money flows out of liquid funds the yields should
technically go up from current yields as the money chasing the money market
instruments is that much less, he said.
    The next few months, therefore, is likely to be challenging for liquid
funds to generate attractive returns but it may just be able to successfully
do that if money market conditions support it.

The table below lists the trend in 1-month returns of liquid funds over the
past 13 months:
End of      Median 1-month       Annualised
            return               yield **
------      --------------       ----------
                       (In %)
            -------------------------------
Aug 2017*     0.55                 6.60
Jul 2017      0.56                 6.72
Jun 2017      0.54                 6.48
May 2017      0.59                 7.08
Apr 2017      0.50                 6.00
Mar 2017      0.58                 6.96
Feb 2017      0.51                 6.12
Jan 2017      0.57                 6.84
Dec 2016      0.53                 6.36
Nov 2016      0.56                 6.72
Oct 2016      0.58                 6.96
Sep 2016      0.57                 6.84
Aug 2016      0.60                 7.20
* As of Aug 23
** 1-month return annualised
Data source: Value Research

End

August 29, 2017

Top 10 algo trading brokers accout for 22% of trading turnover: Report

A story I did yesterday for the news orgn I work for presently:

http://www.cogencis.com/differentiators/ShareNews.aspx?newsId=1003045

[C] Ten brokers using algorithms account for 22% of NSE trading turnover
Cogencis, Monday, Aug 28

NEW DELHI - Ten brokers using algorithmic trading accounted for over a
fifth, or 22.3%, of total trading turnover on the National Stock Exchange
during Apr 2016-Feb 2017, said a report on algorithmic trading and high
frequency trading.
   The report was submitted to the Department of Economic Affairs today.
   The next 10 brokers executing algorithmic trades made up for another 8.6%
of NSE's combined turnover in equity cash and derivatives markets, the report
said.
   Algorithmic trades by all brokers constituted 47% of the total turnover
on the NSE, the report said. The report did not give any data on the same for
the BSE.
   Algorithmic trading makes the use of computer programs to generate and
execute large orders in electronic markets using statistical and technical
models to analyse real-time price movements and make profitable trading
decisions.
   The report, prepared under a joint research initiative of National
Institute of Financial Management and the economic affairs department, said
more than 80% of algorithmic orders on NSE and BSE are generated from
co-location facilities at both the exchanges.
   The report recommended that exchanges invest in advanced surveillance
technology to detect harmful and manipulative algorithms and high frequency
trades, which they lack as of now.
   With regard to high frequency trading, which makes use of algorithms, the
report noted that high frequency traders push a stock's share price up or
down if institutional investors have large buy or sell orders, which results
in an automated version of front-running.
   "Mutual funds that do a lot of large block trading and tend to trade
urgently or predictably are worst hit... (since) high frequency traders'
algorithms sniff their large orders and capitalise on this information," the
report said. 

Reported by Rajesh Gajra

August 22, 2017

Large MFs slow down bank shares' accretion in July, turn cautious

Latest story I wrote for the news organisation I work for currently:



Large MFs slow down bank shares' accretion in July, turn cautious
Cogencis, Tuesday, Aug 22

    By Rajesh Gajra
    NEW DELHI - Select large mutual fund houses have curtailed the rate of
growth in exposure of their equity schemes to large banks last month with
some even reducing the exposure, the latest on-month change in fund house
level exposure in large bank stocks shows.
    This comes in the backdrop of a sharp rise in collective equity exposure
of all mutual fund schemes in all banks in the last one year, rising to
22.57% of total equity assets under management at the end of July from 19.86%
at the end of July last year, according to Securities and Exchange Board of
India data.
    In July, ICICI Prudential Mutual, the largest fund house by total assets
size in Apr-Jun, reduced its fund house level equity exposure in four of the
give largest bank stocks, according to fund house wise share holding data
from brokerage firm East India Securities (see table).
    The equity holding data, which excluded arbitrage funds, showed Reliance
Nippon Mutual Fund's on-month rise in fund house level holding in four of the
largest bank stocks in July slowing down as compared to the previous month.
    HDFC Mutual Fund increased its bank share holdings in July but at a
slower rate in two large bank stocks and stayed unchanged in another bank.
    HDFC Mutual Fund and Reliance Nippon Mutual Fund were the second-and
third-largest mutual funds by total assets size in the quarter ended June,
according to Association of Mutual Funds in India data.
    The on-month change was considered for fund house holding in the five
largest banks by market cap size--HDFC Bank Ltd, ICICI Bank Ltd, State Bank
of India Ltd, Axis Bank Ltd and Kotak Mahindra Bank Ltd. Together, the five
banks' market cap account for 80% of total market cap of 14-stock Bank Nifty
index and form a substantial portion of mutual funds' banking sector exposure.

BANK SHARES
    In the case of SBI, HDFC Mutual Fund and Reliance Mutual Fund
dramatically slowed down their accretion of the bank's shares in July as
compared to the previous month.
    ICICI Prudential Mutual Fund went a step ahead and cut its shareholding
in SBI by 7.19 mln shares on month.
    There was a mixed trend in the case of HDFC Bank shares.
    ICICI Prudential Mutual Fund was seen selling continuously in HDFC Bank
the last three months. At the end of July, the mutual fund's total holding in
HDFC Bank stood at 24.27 mln shares having sold 1.41 mln shares across its
various schemes during the month.
    Scheme wise, the largest sellers in July were ICICI Prudential Balanced
Advantage Fund, ICICI Prudential Select Large Cap Fund, ICICI Prudential
Value Fund and ICICI Prudential Focused Bluechip Equity Fund, data from
Cogencis' Corporate Fundamental Database showed.
    HDFC Mutual Fund, however, increased its fund house level exposure to
HDFC Bank shares in July by 1.96 mln shares on month to 27.52 mln shares,
which was more than the on-month increase in the previous two months.
    Reliance Nippon Mutual Fund bought 980,000 shares of HDFC Bank in July.
While this was an improvement over an on-month decline of 730,000 shares in
June it was much lower than 2.24 mln shares it had bought in May.
    Interestingly, in the case of ICICI Bank, ICICI Prudential Mutual Fund
was a seller for the third consecutive month in July. HDFC Mutual Fund and
Reliance Nippon Mutual Fund too slowed down their fresh accretion of ICICI
Bank shares in July as compared to the previous month.
    A similar trend was seen in the case of Kotak Mahindra Bank shares.

GOING FORWARD
    Banking stocks have been among the most preferred buys of several mutual
funds in the last one year with the industry wide exposure in bank stocks to
the extent of 21.91% of total equity assets at the end of July being the
highest in one year.
    But analysts are cautious of whether the rapid growth seen in bank stocks
exposure will continue in the next one year.
    Valuations of bank stocks are not cheap, according to Vinay Sharma, fund
manager at ICICI Prudential Mutual Fund who manages ICICI Prudential Banking
and Financial Services Fund among a few other schemes. "But there is still
scope for valuation expansion given that we are in early stage of an economic
cycle," said Sharma.
    Any positive or negative surprise on either non-performing loans
resolution, credit growth or any other related reforms could act as a trigger
for increasing or decreasing exposure to banking stocks, according to Sharma.

The table below lists the on-month change in holdings of five large bank
stocks in the last three months by three of the largest mutual funds.

                  On-month change (In mln shares)
                  ----------------------------------------------------------
                  HDFC MF            ICICI MF             Reliance Nippon MF
                  ---------------     ---------------     ------------------
                  Jul   Jun   May     Jul   Jun   May     Jul   Jun   May
                  ---   ---   ---     ---   ---   ---     ---   ---   ---
Axis Bank         0.9   0.4   0.0     1.5   2.6   5.1     2.9   3.8   0.2
HDFC Bank         2.0   1.3   0.8    -1.4  -0.7  -2.1     1.0  -0.7   2.2
ICICI Bank        4.3  34.9   3.3    -5.2  -6.1 -20.1     4.8   6.5   0.4
Kotak Mah. Bank   0.0   0.0   3.2    -0.1   1.1   7.5     0.0   0.1   0.1
SBI               5.0  16.4   2.4    -7.2  64.3   7.2     2.3  12.6   2.3

Data source: East India Securities

End

August 16, 2017

Sebi's 2016-17 Annual Report says fee collection jumped 33% YoY in FY17

Sebi's FY17 annual report reveals details of fees and charges collected from various intermediaries.
Here's something brief I wrote on it for the news organisation I work for currently:
 
 
http://www.cogencis.com/differentiators/ShareNews.aspx?newsId=994895

    Collection of fees from various intermediaries by the
Securities and Exchange Board of India rose a sharp 33% on year in 2016-17
(Apr-Mar).
   This was revealed in SEBI's annual report for financial year 2016-17,
published on its website today.
   The data showed total fees and charges collected by SEBI rose 33% on year
to 5.19 bln rupees in 2016-17, exceeding the on-year growth of 21% in the
preceding financial year.
   The high growth in fees was led by an on-year rise in registration and
turnover-based fee charged to equity derivatives brokers by 14% on year to
894 mln rupees.
   Fees charged to foreign portfolio investors jumped 41% on year to 852 mln
rupees.
   These two categories of intermediary alone made up for a little over
one-third of total fees and charges collected by SEBI in 2016-17 (Apr-Mar).
   SEBI's collection of charges pertaining to offer documents and prospectus
jumped 64% on year to 479 mln rupees while the fees collected from equity
cash market brokers rose 14% on year to 389 mln rupees.
   The only major area where SEBI's fee collection declined pertained to
mutual funds. Total fees and charges collected from mutual funds in 2016-17
were 217 mln rupees, down nearly 10% on year.

DIGITAL DRIVE
   The regulator's annual report also pointed out the measures it had been
taking with regard to the ease of doing business through digital initiatives.
   SEBI said its new enterprise portal, which it had initiated last year to
digitally transform its working, was being expanded in 2017-18 (Apr-Mar) to
cover all intermediaries in the e-registration initiative it had started in
2016-17 (Apr-Mar).
   Further, SEBI said it was going to execute a case management system for
end-to-end management and tracking of all cases it takes up right from
inception till the closure of a case.
   The regulator will also integrate its complaint redressal system with its
mobile app for better tracking and faster resolution of investor complaints,
the annual report said.  End

August 10, 2017

Impact of Sebi's shell companies order on mutual funds

Earlier this week, our capital markets regulator Sebi, rather surreptitiously through stock exchanges, issued directions on 331 suspected shell companies.

Sebi should have issued a press release when it communicated to the stock exchanges to take the measures. But Sebi did not do this.

Anyways, I wrote something (for the news organisation I work for currently) on the impact of the shell companies order on mutual funds --> http://www.cogencis.com/differentiators/ShareNews.aspx?newsId=988544

SEBI order on shell cos likely to hit NAVs of around 25 MF schemes
Cogencis, Wednesday, Aug 9

    By Rajesh Gajra
    Net asset values of a dozen mutual fund schemes are likely to get affected due to their holdings in a couple of stocks which are a part of the trading suspension list emanating from latest directive by Securities and Exchange Board of India on 331 alleged shell companies.
    Mutual funds, currently, do not have holdings in a vast majority of the alleged shell companies.
    Of the 331 alleged shell companies, 48 are listed on the National Stock Exchange of India and the exchange has suspended trading in their shares from Tuesday.
    Mutual funds held shares only in J Kumar Infraprojects Ltd and SQS India BFSI Ltd of the 48 NSE-listed alleged shell companies, data from Cogencis' Corporate Fundamental Database showed.
    In the case of J Kumar Infraprojects, as of Jun 30, 24 mutual fund schemes across seven fund houses had holdings in the company as of Jun 30, and their collective holding value on that day was 2.55 bln rupees.
    Of these, a dozen schemes' exposure to J Kumar Infraprojects' shares exceeded 0.5% as of Jun 30 (see table). The holding of IDFC Infrastructure Fund in shares of the company was worth 92 mln rupees or 3.1% of the scheme's assets under management, as of Jun 30.
    Birla Sun Life Small and Midcap Fund held 223-mln-rupee worth of J Kumar Infraprojects' shares amounting to 2.4% of the scheme assets, while DSP BlackRock India T.I.G.E.R Fund's holding was to the tune of 257 mln rupees or 1.6% of the scheme assets.
    In terms of absolute value, UTI Mid Cap Fund held J Kumar Infraprojects' shares worth 333 mln rupees making up for 0.9% of the AUM of the scheme.
    SQS India BFSI, the other alleged shell company having mutual fund holdings, will have an affect on only one mutual fund scheme. Union Small and Micap Fund held 1.2% of its AUM of 2.37 bln rupees as on Jul 31 in SQS India BFSI shares.
    As per the SEBI directive to stock exchanges, trading in the alleged shell companies will be permitted only once a month on the first Monday. Further, the trading shall take place at a price not exceeding the last traded price, which means the share price can not go up.
    This will hit the valuation of the affected stocks in mutual fund scheme portfolios. And, the higher the exposure of a mutual fund scheme to the affected stocks, the higher will be the impact on the scheme NAV.
    The effect on the NAVs of the affected schemes will be seen over the course of the next couple of weeks and till such time as J Kumar Infraprojects and SQS India BFSI are able to establish to the stock exchanges through documentary evidence that they are not shell companies.

    The table below lists the mutual fund schemes where the holding in shares of J.Kumar Infraprojects was more than 0.5% of their assets as of June 30

                             Holding value*   AUM      
                             -------------    ---       % of holding
                                (In mln rupees)         to AUM
                             ---------------------      ------------
IDFC Infrastructure            92            2960           3.1
Birla SL Small & Midcap       223            9167           2.4
Birla SL Infrastructure       102            5488           1.9
Birla SL Spl. Situations       30            1590           1.9
DSP BR India T.I.G.E.R        257           15580           1.6
HDFC Capital Builder          235           16040           1.5
UTI Infrastructure            191           15630           1.2
UTI Mid Cap                   333           38600           0.9
UTI Multi Cap                  33            3730           0.9
Reliance Small Cap            297           39300           0.8
Edelweiss Mid & Small Cap      28            4620           0.6
HDFC Infrastructure            82           13110           0.6
* based on the share price of Jun 30

End