No Takers For Arbitrage Opportunities

 THE wild gyrations in stock prices over the past couple of weeks have thrown up attractive arbitrage opportunities between the cash and the derivative segments.
    But there seem to be few takers. The futures of many frontline shares are quoting at a significant discount to the stock price. This is not unusual and was witnessed on several occasions last year, when stock prices went into a tailspin.
    However, the disparity between futures and cash market prices rarely persisted, as arbitrageurs quickly moved in for the kill.
    A stock arbitrageur in this context is a trader who takes advantage of the price difference between the cash and the futures market.
    This time round, though, the wide spreads have persisted for nearly two weeks, though it did contract to some extent on Friday as panicky traders covered their short positions, fearing a bounceback in stock prices in the short term.
    Some of the stock futures quoting at a sharp discount to the spot price include ACC, Grasim Industries, Bharat Heavy Electricals and National Aluminium.
    "Over the past one year, volatile markets and a subsequent fall in trading volumes have put quite a few arbitrageurs out of business," said a BSE broker, who requested anonymity. No avenue left for borrowing more shares
"THE ones who have managed to survive are not big enough to take advantage of a reverse arbitrage opportunity," added the BSE broker.
    Conventionally, futures prices always quote at a premium to spot, as there is a cost associated with 'carrying' the position. So, if a stock is quoting at Rs 100 and its near-month futures are at Rs 101, normal arbitrage involves buying the share and selling the future, making a profit of Re 1 in the process.
    A reverse arbitrage opportunity arises when the stock trades at Rs 101 and the near-month futures at Rs 100. In this case, an arbitrageur sells the shares (if he owns them) and buys the futures. In both cases, the positions are closed out before the futures expiry, and then taken up afresh in the next settlement cycle if the spreads are attractive enough. Unlike institutions, which own a sizeable inventory of stocks, resources of local traders are limited.
    Till a few months ago, many overseas investors were actively doing reverse arbitrage. They would borrow shares held in participatory notes account by paying an interest charge to the foreign institutional investor managing those accounts.
    The borrowers would dump the shares in the market, and buy a corresponding quantity of stock futures. But with Sebi barring this form of stock borrowing, overseas investors are unable to capitalise on the opportunity.
    The Automated Lending and Borrowing Mechanism (ALBM) segment too has not taken off despite the regulator relaxing many rules. As a result, there is no avenue for borrowing huge chunks of shares, if some institution wants to. "The huge spreads (see graph) could indicate that most of the short-term overseas players have got out of these stocks, and it could be mostly the long-only funds who are now holding the shares," said a dealer at a foreign broking house.
    The strategy of long-only funds involves purely buying shares and holding them for a reasonable period of time in anticipation of capital appreciation. Such funds do not take leveraged bets, such as equity derivatives.
    santosh.nair@timesgroup.com