Lack of Shorting in Indian Markets Causes Market Distortions: Zerodha CEO Nithin
The Indian stock market has been a subject of interest and controversy in recent times. With the rise of online trading platforms, more and more individuals are getting involved in the market. However, despite the growth, there are still several issues that plague the market. One of the most significant concerns is the lack of shorting in Indian markets, a problem that Zerodha CEO Nithin Kamath recently highlighted.
In a recent tweet, Kamath stated that the lack of a simpler way to short stocks in India is causing market distortions. He emphasized that borrowing stock to short is a difficult and offline process, and the only other option is to use futures and options, which are limited to only 224 stocks. This means that investors are unable to short a vast majority of problematic stocks, leading to distorted market prices.
Shorting is a trading strategy where an investor sells a stock they do not own, with the expectation of buying it back later at a lower price to make a profit. This strategy is used to profit from declining markets or to hedge against potential losses. In a normal market, shorting would help to correct market prices by providing a balance to the buying pressure. However, in India, the lack of shorting is causing prices to stay distorted.
Kamath’s concern is not unfounded. The Indian market has seen several instances of price distortions in recent times. For example, in 2020, the stock price of a particular company skyrocketed to Rs. 700, despite having no significant earnings or revenue growth. This was largely due to speculation and short covering, where investors who had shorted the stock bought it back to cover their losses, driving up the price. Similarly, in 2019, the stock price of another company fell sharply despite having a strong earnings report, due to a lack of shorting.
The lack of shorting in Indian markets is attributed to several factors. One of the main reasons is the difficulty in borrowing stock to short. In India, the process of borrowing stock is complex and time-consuming, involving multiple intermediaries and paperwork. This makes it difficult for investors to short stocks, leading to a lack of liquidity and distorted prices.
Another reason is the limited number of stocks that are available for shorting through futures and options. As Kamath pointed out, only 224 stocks are available for shorting through futures and options, which is a small fraction of the total number of listed stocks. This means that investors are unable to short a vast majority of problematic stocks, leading to distorted prices.
The lack of shorting in Indian markets also has implications for the broader economy. When stock prices become distorted, it can lead to misallocation of resources and inefficient allocation of capital. This can have far-reaching consequences for the economy, including reduced economic growth and increased volatility.
So, what can be done to address the lack of shorting in Indian markets? One solution is to simplify the process of borrowing stock to short. This could involve streamlining the paperwork and reducing the number of intermediaries involved. Another solution is to increase the number of stocks available for shorting through futures and options. This could involve expanding the list of eligible stocks or introducing new products that allow investors to short more stocks.
In conclusion, the lack of shorting in Indian markets is a significant concern that needs to be addressed. As Kamath pointed out, the lack of a simpler way to short stocks is causing market distortions and misallocation of resources. Simplifying the process of borrowing stock to short and increasing the number of stocks available for shorting through futures and options are two potential solutions to address this issue.
