Why the stock markets crashed?

Sunday, February 10, 2008

Why the stock markets crashed?

Is it due to net FII outflows? Or is it due to recession in US? Or is it something else? To answer these questions we need to go a little deep into the capital market and banking system of India.

Let’s take a close look into what happens between a broker and a client and also between the exchange and broker. Take the scenario of a particular trading day. Let’s assume that the market has been going down heavily for a few days. When this happens even though the client has good position, the broker is compelled to sell off the position, why?

This is attributed to the banking system and the system prevailing in the stock exchange. Whatever dealings happen in a day, the broker has to settle that with the exchange before 10 AM the next day. If he fails to do this, he maybe debarred or proclaimed a defaulter. This is the T+1 settlement with the exchange. The market closes at 3:30 PM and the bank through which the settlement has to be done closes on 5 PM and only opens at around 10 AM the next day. So the broker has a very narrow window of just one and a half hours to arrange liquid cash needed for his settlement with the exchange.

But for the payback of money to the broker, the exchange uses T+2 system i.e. it takes two days to clear his settlement. Even though the client has money and he issues a cheque, it takes 2 or more days to get cleared. Due to these facts, even though the client has good position, the broker is compelled to sell off the client’s position to make the settlement.

To improve upon this situation, the cheque clearance system in India should be improved to match with that in the US (where the cheque is instantly cleared as all the banks are interconnected through VSAT).

See also...

Black Monday again: Biggest ever point fall for Markets

Dalal Street loses over Rs five trillion in 5-day fall

ATOzTOA : Latest Headlines


Stock investment said...

That is very good comment you shared.Thank you so much that for you shared those things with us.Im wishing you to carry on with ur achivments.All the best

Post a Comment