Monday’s euphoric market rally in Mumbai may have petered out by now, but it has left behind some questions. It’s worth paying attention to what happened at a bourse an ocean away, in Singapore.
Since March 2008, the Singapore Exchange (SGX) has listed Nifty index futures, or contracts predicting movement of the Indian National Stock Exchange’s (NSE) index of top 50 companies. An average of 16,170 such contracts were traded daily this month, hovering around an average price of $3,262. But on Monday, the volume jumped by 325% to 51,944, with the price increasing by 18.6% to $4,370.
To some extent, these increases reflect enlarged trading in local bourses:?The NSE’s Nifty itself went up 17% that day. But while Indian regulators hit circuit breakers—controls to stop trading—twice, ultimately halting trading in the Mumbai exchanges, Nifty futures continued to trade in Singapore. That means global investors, who have equal access to bourses in both cities, may have diverted capital to make money in Singapore when they could no longer do so in Mumbai.
The nature of the circuit breaker is also worthy of note. Such controls are necessary to stabilize markets caught up in short-term mania, and it’s not as if SGX doesn’t use them. According to SGX rules for Nifty futures, Singapore imposes “cooling off periods” of 5 minutes if the price moves at least 10%. On Monday, it certainly did: Hence, traders were forced to cool off for at least 5 minutes. In contrast, in Mumbai, the first circuit breaker prompted a 2-hour cool off; the second shut down trading for good.
This raises questions for Indian regulators about capital controls. Local investors in India don’t have ready access to SGX, but global ones do; hitting the circuit breaker then puts local investors at a disadvantage, while global ones can decide within minutes where they wish to move capital to. There’s another comparative disadvantage to note: While price discovery for the Nifty continues in Singapore, it doesn’t in Mumbai.
The financial crisis has already placed larger issues surrounding the global movement of capital under the public spotlight. What happened on Monday is another matter worth examining.
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