‘Vyaj badla trades’, one of the most popular features of India’s stock markets in the 1990s, before being banned, are set to make a comeback in a more refined version. In a bid to increase its market share ahead of the launch of MCX-SX, the Bombay Stock Exchange (BSE) will next month offer a new derivative product known as Cash Futures Spread (CFS).
This, brokers say, is similar to the badla system that was used for carry forward trades in the absence of stock futures. But CFS would be less risky and more transparent than its earlier avatar. Vyaj means interest in Gujarati, and badla was a financing mechanism in which money or shares were provided for funding carry-forward deals. The BSE was then a monopoly exchange in the segment and trades worth hundreds and thousands of crores were executed daily using vyaj badla.
The new product, the brainchild of the BSE’s interim CEO and MD Ashish Chauhan, will take away the evil of back-room financing deals that were a headache for the regulator in the earlier badla system. According to the BSE, the CFS scheme will be made available to all stocks in the derivative segment. Under it, a trader can enter cash and futures spread trades as a single order. For instance, if Reliance Industries is trading at Rs 700 in cash and at Rs 710 in the futures segment, the exchange under CFS will put out a spread quote of Rs 10. Three cash-future spread quotes will be available for trading at any time, corresponding to the current-, near- and far-month futures contracts on that underlying asset.
|IN THE 1990S & NOW
|What was vyaj badla?
- Used for carry forward of positions or trades in absence of stock futures
- Vyaj, meaning interest in Gujarati, was cost of financing the carry-forward
- Financing deals, conducted off the exchange platform, lacked transparency
- Sebi banned badla after the Harshad Mehta and Ketan Parekh scams
- Removes back-room financing deals
- Trader can enter cash and futures spread trades in a single order
- BSE will put out a spread, between cash and future of a particular security, as price quote
- Will bring down cost of trading as it may lower STT on delivery trades
The spread here is nothing but the cost of carry for the trader in the futures segment and interest on financing for another trader who wants to deploy his money/share. And as a matter of convenience, all this will be possible in just a single order, without the hassles of financing deals. During settlement, the one who has purchased the shares will get delivery at the agreed spread price at a later date and the other his interest. The technique can also be played in a reverse manner for the seller of the share, earlier known as ‘undha (reverse) badla’. The BSE will put out more operational details regarding the scheme during the week. Exchange officials say attracting initial liquidity may not be a big issue for CFS, as the product will be under a market-making scheme from the first day itself.
“CFS will fuel healthy speculation and improve market depth on the BSE. It is the most sophisticated form of badla,” said Alok Churiwala, managing director of Churiwala Securities and vice-chairman of the BSE Brokers Forum.
Currently, if one wants to take advantage of the spread between cash and future, they have to enter four different trades i.e. buy in futures and sell in cash and then reverse the trade to square off the position. This involves the risk of price fluctuation and the cost is also high as four transactions or orders are executed.