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Market meltdown spreads to new indices

Analysts say the bid-ask gap is widening on these indices which is turning away investors from carrying out trades on these indices, reports Vyas Mohan.

business Updated: Aug 24, 2007 04:20 IST
Vyas Mohan

It seems the turmoil in the stock market has not only affected investors, but exchanges as well.



A meltdown in the equity market and ensuing volatility has seen a substantial drop in business volumes generated in certain relatively new stock indices. Turnovers recorded in two of the relatively new indices of the National Stock Exchange (NSE) have shown declines in the range of 77-99 per cent since June 2007.



While the turnover in the CNX 100 has gone down from Rs 9,229.31 lakh (on June 1, 2007) to Rs 11.97 lakh (on August 22), registering a drop of 99.87 per cent, the Nifty Junior has fallen from Rs 13,822.88 lakh to Rs 1,580.12 crore during the same period (a decline of 76.9 per cent).



According to analysts, the bid-ask gap (difference between buy and sell orders) has been widening on these indices and has resulted in a rise in the impact cost, thereby turning away investors from carrying out trades on these indices. “The bid-ask gap is widening and thus order matching is getting more difficult. The impact costs are also edging higher,” Alex Mathew, head of research of Geojit Securities, said.



Impact cost, or the cost of carrying out a transaction at the exchange goes up as the liquidity of that stock decreases. The impact cost, which is percentage difference of ideal buy price and the actual buy price on the ideal buy price, is a clear indicator of the stock’s liquidity. A higher impact cost means lower liquidity in the counter, which is a turn off for high-net worth and institutional investors. These indices had recorded higher volumes in the past, when broking houses allowed transactions at a nominal commission to woo investors, brokers said. Commissions charged now are on a par with those on any other transaction, sources added.



However, the NSE did not respond to an e-mailed query on whether it was in line with the exchange’s request that brokers charged lower commissions on trades in these indices and the reasons for the drop in volumes.



Clearly, the future does not look very bright for the CNX 100 and the Nifty Junior. “High-net worth investors and institutions carry out trades in bulk and the impact cost is very important for them. Now that the cost is edging higher towards the levels it was during May-June 2006 (during last year’s market crash), it is a worrisome signal. This turns off big investors,” a broker said.