Each year, be it a calendar or a financial, there are some significant situations or events that are planned in nature that have a significant bearing on the markets & therefore, the market participants. Depending upon which side of the market one is and the way the market responds or reacts to the events/situations/news, one may end up making good to super gains or end up incurring a significant loss or losing it all.
It is commonly said that trading is a zero-sum game as for one person to make money, the person has to lose, and therefore, by nature, both sides can never win. This is true in all forms of actions and games as for someone to be a winner, the other person has to lose.
This sounds logical, but having been in the trading world for a few years, I am well aware by experiences as well as observations that this is not a good thing to have. As a good-natured person, X may not like Y losing or making money at the cost of Y losing.
Given the background, the recent hype about the US jobs data made me think about a possible way to minimize the damage to the losing side and that is why I thought of writing this post as well as recording a video to share my views. You may or may not agree, and I am perfectly fine with it.
The Possible Solution
Today is the day when for the first time SEBI has mandated crediting all the Demat account holders with the credit balances lying in their respective ledgers and that is what has triggered the possibility of the issue discussed in the background.
When SEBI can mandate that on a quarterly basis, all brokers should compulsorily credit the Demat account holder with the unused credit balances, why cannot it or should it not compulsorily, liquidate all unhedged F&O positions in all the Demat accounts?
I know now you are thinking that this is insane! How can they do so and why should they do so? Why should I be deprived of the joy of making a killing when I am simply following the trend for the largest time and the readers may have many such reasons like that? I respect all your views and thoughts, however, please read my side of the story as well.
Why is the solution necessary?
- In my view, the big events/news/situations, however, planned they may be, is usually likely to trigger unexpected and for a set of traders, unpleasant moments.
- Those with unhedged positions may end up either building a fortune or losing the one already created should the move go in the intended or against the intended direction respectively.
- Usually, the market moves in such cases are not logic or trend-driven but emotions or sentiment and more importantly global cues driven.
- And when emotions and global cues drive the price action, trends are unlikely to be always in sync.
- However, in case a trader has a hedged position, the likely loss or the gain, as the case may be, would be a defined one theoretically at least. And this would immensely help all the market participants in the long run.
- For a good and responsive market, it is necessary to have a large base of market participants and such measures would ensure that even uninformed traders would be saved from the potential routs in their ledger and would be saved to a great extent from the risk of ruin.
- SEBI is said to act in the interest of the market participants and its duties towards retail traders and investors are significant as it is the watchdog. So in my view, SEBI should act on its own and mandatorily square off all unhedged positions.
Case in Point
On 7-10-22, the US jobs data was to be announced, and obviously, this release was to be made after the close of our markets for the week. So the only time that our market would be able to react is on 10-10-22, Monday.
I remember that until the pandemic, this was not a big deal even for me as things used to happen in the normal course and I realized how significant such events are from the viewpoint of the market only during the pandemic and then after the Russia-Ukraine situation. So I guess even now, there would be several traders who are holding long-only or short-only F&O positions following the process that they are good at and that works for them.
ended 7-10-22 at 17314 & SGX Nifty ended the day after below-par jobs data was made known, at 17070. This is 244 points which may translate to 550-750 points in as well. It is a significant down move assuming that our markets would also open around the same level.
What would happen to the longs? Not every long may get impacted adversely, but a large portion is likely to be. Also, remember that the ledger balance would be Zero on account of mandatory payout so the margin shortfall would kick in as soon as the bell rings!
It is quite possible that Crores would be lost in thin air by traders holding unhedged positions and even those with hedged positions may find themselves in a spot as Vix would spike and Options may be priced much higher than what they would have thought of at the time of hedging.
Would the above be a fair situation to experience? Certainly not for a trader who has carried forward F&O long positions and it is likely to be an advantageous one just because the market appears to have not liked the jobs data.
It is in this respect that I felt that SEBI should do something to protect the interests of the small or retail F&O traders. I must confess that I am not holding any F&O position for now and precisely for the reason mentioned above.
Such eventualities may not be recurring each week but may one very infrequently but would go a long long way in instilling confidence in the intentions of the regulator in the eyes of the market participants.
I know that my posts are being widely read but I am unsure if someone from SEBI is also reading the posts as only then would there be some action. In order to enhance the reach of my thoughts, I have created a video as well on the same, and the link is given here:
I sincerely hope that the “watchdog” does something good for the greater good and sets a precedent that the other global markets may even be tempted to follow.
As always, I would love to read your feedback.
Video link: https://youtu.be/z60BULgM_20