Badla/ALBM: Riding high volumes

Sanjiv Shankaran

THE year's salient feature was the nationwide spread of the facility to carryforward contracts to subsequent settlement cycles following the introduction of the NSE's modified Automated Lending and Borrowing Mechanism (ALBM).

By the end of the year, the aggregate value of contracts carried forward through the ALBM and the BSE's badla system was close to Rs 6,000 crore. Both almost have an equal share now, indicating the dramatic rise in ALBM volumes.

From the preceding system, where the facility to postpone payment for contracts was limited largely to Mumbai-based investors, investors across the country can now borrow to back their hunches. This suggests that the next time there is a bull run, the impact of leveraged trades can intensify the extent of the uptrend. And it can work the other way too.

Another interesting change in the pattern of badla trading was that technology and media stocks became the most popular stocks, replacing commodity heavyweights that held sway earlier. Right from the start of the year, when technology companies led the bull run, technology stocks accounted for a significant portion of the badla turnover.

While the high turnover in technology and media companies during the bull run was expected, the subsequent pattern of trading in the badla session was more interesting.

When the technology and media stocks began to fall after the Union Budget in February, the general opinion was that it was a good opportunity to buy top-rung companies at a moderate price. The badla trading pattern suggested that quite a few investors were willing to trade on borrowed money to back that belief.

The general decline in technology and media stocks, however, continued in the third quarter -- interspersed with a few short rallies -- while technology and media stocks remained the favourites in the badla session.

Technology stocks continued to be the most liquid counters, but the trading pattern also provided clues to other stocks that gave handsome returns. Notable among them was Gujarat Gas, where the increase in liquidity mirrored the rise in share price. Towards the end of the year, Gujarat Gas was among the most liquid stocks in the badla sessions.

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The trading pattern of Gujarat Gas was an exception of sorts. Investors who may have looked to the Indian version of forward trading for clear-cut clues on the price trend, were bound to be disappointed.

Late year rallies such as the one in cement stocks did not come through clearly in the carryforward sessions. In stocks such as Grasim, increased interest seemed to come well after the stock was on its way up.

The sharp ups and downs during the year left one wondering how reliable the badla trading pattern was as an indicator of future price. At the year's end, the answer seemed to be that the signals from the market might be quite like the stock market pundits predicted: Great in a bull market and unreliable in a volatile market. A fair weather friend, perhaps.