Big foreign investors and fund managers are complaining about leaks. They contest that information about massive transactions are getting out easy and they want SEBI to intervene.

So in today’s Finshots we discuss this and more


The Story

If you want to buy or sell large quantities of publicly traded stocks, then you have to do things a bit differently. For instance, if you are planning to trade shares whose value exceeds 0.5% of the company, then that will be classified as a bulk deal. And it’s important to mark it as such because the people have a right to know. If somebody is trading such large volumes, then there’s good reason to believe that such activity would affect prices rather considerably. And if regular investors are left in the dark about such transactions, it doesn’t set a good precedent, you know. So the regulator mandates stock exchanges to report these transactions.

But they are not always disclosed immediately. After all, these are massive deals and you might not be able to fulfil them in a single transaction. Sometimes a single buyer might need multiple sellers. And a single seller might need multiple buyers. If it happens in a single go, then the broker facilitating the transaction reports to the exchange immediately. If it goes through in tranches, then the broker will have to intimate the exchange one hour before the trading ceases. Nonetheless, the stock exchange needs to publicly disclose this information the very same day and that’s when people finally get to know about these massive deals.

Anyway, this is how the stakeholders in the system envision a clean bulk deal. But it almost never works out like this. Why? you ask.

Well, the reason is simple. These deals can happen in one of two ways. It can happen in the upstairs market or it could happen in the downstairs market.

As Investopedia puts it — “In finance the term “upstairs market” refers to trades that are carried out directly between the buyer and the seller, with professional brokers acting as intermediaries.” Buyers and sellers negotiate a price internally and then execute the trade during a small window — open for 15 minutes, twice a day. However, you can’t negotiate any price you want. You have to be very close to the last traded price. For instance, if the stock was trading at Rs. 100 during the closing hours yesterday, you have to negotiate a price between Rs. 99 and Rs. 101 (+/- 1%). If you can’t, then you have to go “downstairs” — where your order will be sent to the stock exchange. In fact, it's where most orders go, when people try to buy and sell shares on their favourite trading apps during normal trading hours. And the stock exchange is responsible for getting them the best deal by sifting through hundreds and thousands of other orders floating in the system.

Bottom line — If you want to be absolutely certain you want to execute a large order at a pre-defined price then you’re better off doing it in the market upstairs. However, if you are planning to buy or sell shares at a price outside the 1% range, then you have to move downstairs. And in most cases, big investors are forced to move down because they want flexibility in negotiating a price.

At this point, you have to ask yourself — What happens if information about the bulk deal is already in the public domain by now? What if other people know that a massive deal is just about to go through?

In fact, rumour has it that details about such deals have been getting out consistently of late. As an article in ET Now notes 

“In the Kotak Mahindra Bank deal, promoter Uday Kotak sold 56 million shares of Kotak Mahindra Bank to pare[reduce] his stake on June 2, 2020. The shares were purchased by a set of foreign and domestic institutions including JP Morgan and Oppenheimer.

And foreign investors contend that details about the deal were already being shared via tweets even before the transaction was executed. And if there’s any truth to this story, then that changes everything. For instance, if you know there’s a sophisticated investor buying large quantities of certain shares, then you’ll likely try to profit off of that information. Maybe you will start picking up some shares yourself. Maybe you’ll tell your friends about it. Maybe someone will tweet this to their audience. All of this might inadvertently push prices higher in the market downstairs. Or even worse, affect the actual transaction itself.

In fact, these big investors contest they don’t even get what they want because some other chap is trying to get there first. They contest their orders don’t get filled because everybody’s vying for those same shares —considering information about this big deal is already out there. So yeah, these people want SEBI to intervene and make sure they don’t get fleeced in the process.

That’s the story.

Until next time…

Also, if you liked what you read don't forget to share this article on WhatsApp, LinkedIn and Twitter