Exit polls and the stock market drama

The contrast between exit polls that were tremendously bullish on the comeback of a Bharatiya Janata Party (BJP)-led government and the actual election result that makes it impossible for BJP to even form a government on its own created market movements on such a scale that its tremors have travelled from Dalal Street in Mumbai to the corridors of power in New Delhi.

The Congress accused the leaders of the BJP of misleading the public while exit pollsters allegedly manipulated the stock market, and has demanded a Joint Parliamentary Committee investigation on the matter.

Piyush Goyal from the BJP made a counter statement in a press conference that "following exit polls, foreign investors bought stocks at high rates while Indian investors sold and booked profits."

On June 3, one day prior to the result, the Nifty moved up by 4% as most exit polls gave over 350 seats to the National Democratic Alliance (NDA) that created a frenzy in the stock market. On June 4, the Nifty Index crashed by 2,300 points (over 6%).

Goyal's statement cannot be verified unless data reveals that only Foreign Institutional Investors (FIIs) bought stocks on June 3 while Indian retail investors only sold stocks.

Moreover, the cash segment or delivery of shares is just 0.4% of the overall transactions in the Indian stock market as 99.6% transactions are for derivative market comprising Future and Options (F&O). It is these 99.6% of the transactions that happened on June 3 and 4, where the actual profit and losses of investors would reveal the real picture.

On June 4 (result day), the Indian derivative market witnessed unusually high volumes. A total of 554.2 million contracts were traded on June 4 while the notional traded value in the derivative market was ₹415.39 lakh crore. On that day, the entire stock market capitalisation was less than ₹400 lakh crore, indicating that trading in F&O segment alone was more than the market capitalisation of all the listed stocks. This volume was almost two and a half times of the previous day F&O volume of ₹191,06,880 crore. Such high volume is indicative of nervousness among market participants.

The delivery volume for stocks was highest on June 3, the day when exuberant investors and traders took 49.79% of traded volume as delivery. Investors opt for delivery of shares only when they are confident that the share price will move up in future.

The delivery volume of shares on June 4, June 5 and June 6 was 45.46%, 45.92% and 41.38%, while it was 49.79% on June 3. This indicates an anomaly in delivery trades on June 3 when exuberant investors would have taken unusually high delivery on the back of exit poll numbers.

It can be derived from the market trends that a large chunk of transactions on June 3 would have been in the F&O segment and whoever bought call options and went long on indices, assuming that the market would soar further, may have lost money if they could not pay up the margin money that the fall of June 4 would have required.

Moreover, the unusually high volume of derivative trading on June 4, which was not an expiry day for Nifty, indicates that humungous positions may have been squared off due to paucity of margin money, usually by retail Investors, and/or more F&O trading would have been ensued by investors who had the money to place further bets on the stock market.

Implications for the market

With FIIs comprising 16% of the investor cohort in the Indian stock market and any of the market participants, whether Retail, DIIs, or FIIs, losing money on misinformation is a severe blow to the credibility of market.

While the war of words may continue between BJP and Congress, it is important for the Indian stock market to come clean as any investor losing money due to front-running erodes the credibility of the market and reduces it to a gambling den controlled by an underground mafia that favours only their own.