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Trading data does not tell the full story

The finance ministry released some information about the trading patterns on the country's stock exchanges. There were a handful of data in the statement but one that grabbed headlines was the fact that a vast proportion of the trading volume on the stock exchanges comes from a handful of investors, writes Dhirendra Kumar.

india Updated: Aug 23, 2010 23:03 IST
Dhirendra Kumar

Last week, the finance ministry released some information about the trading patterns on the country's stock exchanges. There were a handful of data in the statement but one that grabbed headlines was the fact that a vast proportion of the trading volume on the stock exchanges comes from a handful of investors. Half the cash segment trading comes from 451 investors and half of the derivative options trading comes from 106 investors.

At first glance, this appears to be a fantastic amount of concentration of stock market activity in an unexpectedly small number of investors. However, I don't agree with this view. I think this amount of concentration should be considered expected and normal. Not just that, it's not even a very significant statistic and doesn't tell us anything useful about stock ownership or about participation in the stock markets. And it tells us absolutely nothing about who's making money out of stocks.

I'll illustrate my point with a real world example. I have a friend who is the archetypal 'high-networth individual'. He has a trading business and is also an active day trader on the stock markets. The last time he told me some details about his trading activities, he had about Rs 5 crore deployed in the markets. He also told me that he ended up 'rotating' (his word) this entire sum at least once over two to three days. Even allowing for some inaccuracy, this implies an annual trading of Rs 300 to 400 crore from an investor with 0.25 per cent of that amount actually deployed in the stock markets. At the other end of the spectrum, there are equity mutual funds with Rs 2,000 crore and above that have annual trading of less than a tenth of that.

However, the punchline of my story is that my friend has never made any significant amount of money out of stocks. It's just an expensive channel of entertainment that appears to have a goal.

I'm not saying this sort of an investor dominates the top half of that statistic. For all I know, there could be enough high-speed automated trading in India to have rendered the traditional day-trader's volumes irrelevant. All I'm saying is that many people seem to be over-interpreting statistic on trading. They actually tell us close to nothing about who owns stocks and who makes money out of them.