For what seems like forever, institutional investors have been asking the Securities and Exchange Board of India (Sebi) to relax the rules that govern block trading.
Rather than moving forward, the conversation has now taken a turn that is causing anguish among the investors. In response to complaints that the lack of flexibility in the block trading window results in slippages for institutional investors and exposes them to the risk of front-running, Sebi has asked them to provide evidence of these ills in the Indian stock market. Talk about role reversals. Who really is the market watchdog and who should be collecting evidence?
Institutional investors may well be excused for thinking this is another delaying tactic by Sebi. After all, they’ve been getting the cold shoulder from the regulator for years now.
For perspective, block deals are privately negotiated between two or more large investors and are executed on a separate platform. In India, the block deal window can be used only if the negotiated price is within 1% of the previous day’s closing price.
However, most large deals happen at a larger discount of 5-7% to prevailing prices. This forces institutional investors to execute their privately negotiated deals in the downstairs market, where orders are matched on a price-time priority. This results in so-called slippage, where other investors interact with the large orders and one or more of the institutional investors end up with a lower number of shares than intended.
Institutional investors say the solution is to relax the price range for trades negotiated in the upstairs market. If the current 1% range to qualify for the block deals window, for instance, was relaxed to 7%, the problem of slippages and front-running can be avoided, they say. It has been well-established through research that having an upstairs market does not impact the efficiency of the downstairs market in terms of volatility or impact cost. On the other hand, block deals executed in the downstairs market typically have a high impact on prices, as they attract more trades in the same direction.
Despite all these seemingly convincing arguments, it appears that Sebi is unlikely to budge. After all, it is a very different regulator. Its heart beats for retail investors far more than the average regulator. If there is the slightest doubt that greater freedom for the upstairs market disadvantages the downstairs market, even if research explicitly disproves this, trust Sebi to not make any change to the market structure. “Sebi has historically had a problem with the upstairs-downstairs distinction. It doesn’t like the idea of dividing the market, thinking it could result in a drop in liquidity for the rest of the market. It prefers it when retail orders have the ability to interact with all other orders," said a Sebi official.
As for institutional investors, who are peeved with slippages and front-running, they may just have to consider it an additional cost of doing business in the Indian markets.
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