Bulls, Bears and Other Beasts Read online

  Reliance Industries, ACC, Grasim, Bajaj Auto, Century Textiles, ITC, GE Shipping, Century Enka, Castrol, TELCO (Tata Electric Locomotive Company then, and Tata Motors now), TISCO (Tata Iron and Steel Company), Tata Tea and Tata Chemicals were among the most actively traded stocks of those days.

  Nemish Shah, Manu Manek and Ajay Kayan were the high rollers, revered by market players for their ability to make or break a stock. Manu Manek was more feared than respected because he could be downright ruthless to further his business interests. It could be safely said that, as the biggest badla financier on the exchange floor, Manubhai was the final arbiter of the interest rate to be paid by the bulls for carrying forward their trades to the next settlement. He had no qualms about hammering down the price of the very stock he had financed for a bull operator. Manubhai, who was considered something of a mini-stock exchange himself, could quickly figure out a bull operator’s capacity to support the stock he was operating. If the operator was weak, Manek would short-sell the stock. And once the operator made a distress sale, Manek would buy back the shares cheaper than he had sold them for, making a tidy profit in the process.

  He had an uncanny ability to commit hundreds of trades to memory. While in the ring, he rarely noted down his trades in the sauda pad (deal sheet), even though he dealt in multiple stocks. At the end of the day, he would get back to his office and dictate the trades to his clerks.

  And he had one more strong point – an excellent rapport with the key officials in the Bombay Stock Exchange (BSE) employees’ union. Call it a coincidence, but whenever Manek was in a tight spot over a trade, there would be a flash strike by the employees’ union, and the settlement would get extended by a few days, helping him buy time.

  Manek was fearless enough – or reckless, as the subsequent turn of events would show – to take on Dhirubhai Ambani by leading a bear raid on the shares of Reliance Industries. The bear cartel heavily short-sold Reliance Industries, aiming to break the stock price. There are two versions of the story, and I am not sure which one is true. One has it that it was a planned operation by Manek to assert to Dhirubhai his hold on the stock market. The other has it that Reliance’s treasury department (which deploys the funds of the company in various financial instruments to get the best returns) had borrowed money from Manu Manek to make stock market investments. Manek is said to have goaded his associates to target Reliance shares, saying the company was financially vulnerable. He also made some disparaging remarks about Dhirubhai for good measure.

  Bears won the initial round as the stock price flagged under their relentless onslaught. But they had not bargained for an equally fierce counter-attack led by Anand Jain, Dhirubhai’s key lieutenant. Jain and his associates took over the positions of the brokers and traders who had bought Reliance Industries shares, and also themselves bought as many shares as they could from the market. On the other side of these trades was the bear cartel, which had short-sold Reliance shares or sold shares they never owned in the first place. As the share price started to climb because of the demand created by Jain and his associates, the bears tried to get out of their positions by buying shares from the market. But the shares were in short supply, as most of them had been bought up by Jain and company, and the bears’ attempts to square up their positions only sent the stock price shooting up further.

  The bears thought they could buy time by paying an interest charge to the bulls on settlement day to carry forward their trades to the next settlement. They were still convinced that if they hung on to their positions for a bit longer, the price movement would reverse in their favour. But the ‘buyers’ of Reliance shares refused the offer of interest payment, and insisted that the bears deliver the shares, fully aware that they would not be able to. Frantic buying by the bears to square up their positions further drove up the stock price. The crisis led to the stock exchange itself being closed for a few days as the bears could not deliver the shares and the bulls would not settle for anything else.

  A truce was worked out eventually, but not before a few bears were bankrupted and the legendary Manu Manek forced to eat humble pie.

  In comparison with Manubhai, Nemish and Kayan kept a far more low profile. Kayan was more active on the Calcutta Stock Exchange than on the BSE. He was also a dominant player in the opaque world of the money market. Before long, Kayan would be locked in a pitched battle with Harshad Mehta in both the money and stock markets. It was a tussle that would alter the landscape of the Indian financial markets forever.

  As for Nemish Shah, he was slowly making a transition from being a speculator and broker to a value investor, and even playing mentor to some budding speculators, at least one of whom would, down the years, become more famous than his guru. Shah’s firm Enam Securities was among the reputed brokerages on BSE. Shah himself had been a protégé of Manu Manek at one time, and had learnt the ropes of the trade from him.

  All this while, Harshad Mehta’s stars were on the ascent. He was an important player, well known in market circles, but not yet a heavyweight in the same league as Kayan, Shah or Manu Manek.

  3

  Learning the Nuts and Bolts

  The brokerage firm for which I was working was not as inconsequential as I had initially thought. It was just that the owner liked to keep a low profile. And, exactly for this reason, some corporations and institutions preferred to deal with him. I worked in the back office, filling the share transfer deeds for buying clients and following up on deliveries to be made by selling clients. This way, I got to learn exactly who was selling or buying what shares. In the shallow market of those days, this information was valuable, since some of our clients were important players in the market.

  My salary as a back office clerk was Rs 2,000 a month, about the same that I earned at my previous job. But I had no doubt that I had chosen the right path, even if it did call for a bit of luck to hit the first milestone I had set for myself.

  My job was monotonous, but I did it with utmost dedication as I saw it as a stepping stone to the trading ring where the real action lay. After office hours, I would attempt to make friends with my counterparts in some of the other important brokerage firms. Though I was a reserved person, I began to realize the importance of being well networked, even if I was starting small.

  My hard work was not lost on the owner of the firm, and he felt I could be used better than just as a paper sorter at the back office. A broker could have seven of his dealers in the trading ring, apart from himself. Orders placed by clients over the telephone to the broker’s office would be conveyed to the dealers on the trading floor, who would then execute the trades. Before the days of the hotline, brokerage firms had runners who would rush to the trading floor to relay orders.

  When one of our dealers quit, I was asked if I would be interested in taking his place. I agreed, taking care not to show my excitement. I knew my boss was testing me out. He liked employees who worked hard but was wary of the overenthusiastic types.

  Initially, my job on the floor was to answer the hotline and convey the order details to the senior dealers who would be scouting around for good bargains. For one month I was assigned to a senior, and had to observe him as he negotiated deals with brokers and jobbers.

  A jobber is a professional speculator, and buys and sells shares for himself. He does not have any clients. His business is to speculate on which way prices are moving and make a quick profit on it. He does not want to buy shares and keep them for the long term as investors do. But, to do business on the floor of the stock exchange, he needs to have a broker as a sponsor. He shares a part of his profit with the broker under a pre-decided agreement.

  You could say that in a way he acts as an agent of the broker. If the jobber defaults on a deal, the broker is held responsible by the stock exchange. Brokers, therefore, choose jobbers with care. Jobbers were an important source of liquidity, and brokers would always deal through them.

  In those days, there were ‘counters’ for individual stocks. Jobbers and b
rokers dealing in Reliance shares would gather at a certain spot, those dealing in Tata Iron and Steel shares at another spot, and so on. ‘A’ group shares, in which a buyer or seller could carry forward trades to the next settlement by paying an interest charge known as badla, were called vaida. ‘B’ group shares, which were not eligible for carry-forward, were called rokda (cash) since they had to be settled at the end of the fortnightly settlement cycle, either with the positions being squared off or with the shares being delivered.

  There was a public address system on every floor of the stock exchange building, on which would be broadcast the prices of mostly A group stocks, and sometimes B group stocks if there were big moves on them, corporate results and other important company announcements. For a price, brokers could get an extension of that system so that they could hear the broadcast sitting in their offices. Brokerages wanting to save on costs would usually station one of their employees in the corridor of the exchange so that they could alert their offices about important announcements.

  The trading ring was on the first floor. Outside both the first and second floors were huge blackboards on which an employee of the stock exchange would write down the prices of the most actively traded stocks, updating them every thirty minutes. The official would collate the prices by talking to the main brokers and jobbers to find out what prices they had bought or sold for. After he had updated the prices on the blackboard, he would trade places with his colleague who had been broadcasting the prices. That official would then head for the ring and update the blackboard after half an hour.

  Around half past five in the evening, the stock exchange would publish the ‘bhav copy’, a report listing the high, low and closing prices of the stocks traded that day. It was not done very scientifically, but it was broadly reliable. Its compilation was done by means of a stock exchange official collecting the prices by talking to the brokers and jobbers, and checking their sauda pads (which were issued by BSE and bore its stamp) if necessary.

  The stock exchange issued only a limited number of bhav copies, so there was always a scramble to get them. Some ingenious players found a way to profit from this by taking photocopies of the bhav copy and selling them outside the stock exchange for a few rupees.

  After trading hours there operated an unofficial market for some of the more liquid stocks. This was called the kerb market and, true to its name, the dealings were conducted on the street outside the stock exchange. The prices in the kerb market would be at a premium or discount based on the closing prices on the stock exchange, depending on the sentiment and events. There were players who specialized in kerb market deals and did not trade much in the regular market. When they did deal in the regular market, it was mostly to put through the trades that were struck over the phone or on the kerb the previous day.

  The specialist kerb traders had their representatives on the street where the business was transacted, taking orders from clients. Right outside the erstwhile Lalit Restaurant on Ambalal Doshi Marg, parallel to Dalal Street, was where the kerb deals were conducted. Activity on the kerb would rise to a feverish pitch during market-moving events. During such times, it was near impossible to navigate the sea of humanity on that street without being pushed around.

  Of all the players in the stock market, it was the jobber whose role fascinated me the most. I would closely observe them as my seniors negotiated trades with them. A jobber helped create liquidity in a stock by offering two-way quotes and also helped in price discovery. He took on the risk, confident that he would be able to sell whatever he bought and buy back whatever he sold. But for this breed of players, it would have been difficult for genuine buyers and sellers to transact with ease.

  A jobber would buy from you at a rate lower than what he would sell to you for, and the difference or ‘spread’ as it was known, would be his profit. The spread quoted by the jobber would depend on the quantity of shares you wanted to buy from him or sell to him – the smaller the quantity, the less the spread, and the bigger the quantity, the wider the spread. A jobber had to ask for a higher spread while dealing in big quantities since the risk he took was higher.

  To be a successful jobber, one had to be very good at mental arithmetic. If you were jobbing in more than one or two stocks, then your skills needed to be even sharper. That is because you were carrying an inventory of shares at all times, irrespective of whether you were long (had a buy position) or short (had a sell position) on a stock.

  It was not just enough to remember the number of shares you were long or short on; you had to remember the average buying or selling cost of those shares. That in turn would decide the bid-ask spread (‘bid’ is the price quoted by the buyer and ‘ask’ by the seller) a jobber quoted.

  Jobbers would note down their deals on their sauda pads, but sometimes, when there was frenzied trading, a jobber would be doing trades in rapid succession and not get enough time to write all of his deals down. He could also be trading in more than one stock, making his task even more complex. It was in these situations that a jobber’s skills were tested to the maximum. I knew of expert jobbers who could memorize their inventory and the average price of trades in nearly two dozen stocks without having to check their deal pads.

  A good jobber also had to be a skilled psychologist. It required him to be able to size up a prospective counterparty and gauge whether he was a likely buyer or seller. His profit margin would hinge on his ability at this. No counterparty would reveal whether, and how much, he wanted to buy or sell. All he would do was ask for quotes from the jobber.

  A typical conversation between the two would run on these lines:

  ‘What is the quote for Arvind Mills?’

  ‘57-60.’ (I will buy from you at 57 and sell to you at 60)

  ‘What quantity is this valid for?’

  ‘500 shares.’

  ‘I want to sell 500 shares.’

  ‘Okay, bought 500 shares from you at 57.’

  ‘Does your quote hold good for another 500?’

  ‘Yes.’

  ‘Okay, I want to sell another 500 shares.’

  ‘Bought 500 from you at 57.’

  ‘I want to sell another 500. What’s your quote?’

  ‘56-59.’

  ‘Okay, I am selling 500 more to you.’

  ‘Bought 500 from you at 56.’

  ‘How about 500 more?’

  ‘55-58.’

  As the client keeps selling more, the jobber will keep lowering the bid-ask quotes, but not necessarily the spread, which will remain Rs 3. That is because the jobber is now running up a plus-position, and his profit will depend on how cheap he can get the shares.

  A good jobber will move in and out of positions as many times as he can for a small profit each time. His aim is to make a decent profit through a series of small profits instead of through one giant trade.

  The more heavily traded the stock, the smaller will be the jobber’s spread, because there will be plenty of buyers and sellers. For an illiquid stock, the spread would be wider, and at times even outrageous if a jobber enjoyed a near monopoly in that stock. There were different categories of jobbers, depending on the risk they were willing to take.

  A jobber also had to have the instinct to figure out who the ultimate buyer or seller of the shares he dealt in was likely to be. Sometimes the counterparty would have information the jobber was not privy to, and the jobber might end up buying or selling a stock, unaware that the die was loaded against him.

  A broker transacting with a jobber could be acting on his own behalf, or on behalf of a retail client, an institution or even the promoter of the company whose shares he was trading in. When a promoter is behind a deal, he may not necessarily be capitalizing on some inside information. But if he is, then the jobber would likely be in for trouble.

  A jobber was always in demand because brokers preferred to deal with him rather than with each other. Since jobbers played for small profit margins by trading as many times as possible, brokers had the co
mfort that they would not be overcharged. Most jobbers had to get out of their positions quickly enough, even if it meant taking a smaller profit, since their ability to absorb losses was limited. Rarely did they carry positions to the next day.

  There was an unwritten rule that brokers would not try to make a big profit at the expense of the jobber because that could ruin him. At the same time, the jobber too had to respect the confidentiality of the broker dealing with him. If a broker was buying on behalf of a promoter using some inside information or buying a huge block of shares for an institution, he would, after the trade, casually tell the jobber something like, ‘Don’t keep your position open for too long,’ or ‘Take your profit and move on quickly.’

  This meant that more buying or selling was coming and that the price could see a sharp move. Of course, the broker had to trust the jobber enough to let him in on such information. An honest jobber would then try to close out his position quickly and not take up a position on the same side as the broker so as to profit from the information.

  Brokers looking to buy or sell large blocks were often at the mercy of jobbers, and it was to the credit of the jobbing community that a great majority of them did not misuse this power. As mentioned earlier, the quote offered by a jobber was valid only for a certain quantity of shares. Beyond that quantity, a buyer or seller would have to move on to the next jobber or trust the same jobber’s ability to source the extra shares or dispose of the remaining shares, as the case may be.

  There was a dangerous and hated breed of jobbers called ‘robbers’. Though they were in a minority, they were financially strong and had the wherewithal to hold on to large positions. The code of honour and unwritten rules among trading members mattered little to these ‘robbers’, whose only motive was to earn maximum profit even if it came at the expense of their clients.