Day traders can only daydream as volatility gets too hot to handle

Day traders can only daydream as volatility gets too hot to handle

Mumbai: Day traders Salim Merchant and Dharmesh Shah have increasingly been cutting their trading activities in the equity market since 27 July when the Sensex, the benchmark index of the Bombay Stock Exchange, started swinging to the subprime woes in the developed markets.

The volatility in the market, the duo says, is simply too hot to handle. Indeed, the Sensex plunged another 4.28% on Thursday, reacting to two days of declines in global markets.

Till recently, Merchant and Shah were a daily fixture at one of the branches of Mumbai-based Angel Broking Ltd. Now they go to the brokerage’s branch but don’t do much more beyond staring at the trading terminal.

Merchant and Shah are just two of the many day traders running scared of trading as they don’t have the stomach to ride the extreme volatility that the Indian market has been experiencing.

On 27 July, the Sensex lost 541 points to close at 15,234. Since then, the index has been moving both ways in a choppy market. It closed at 14,385.21 on Thursday, losing 642.7 points and well below its lifetime high reached just three weeks back on 24 July.

The average difference between the intra-day high and low of the Sensex in four trading sessions from 27 July to 1 August was well over 350. For the period from 27 July to 14 August, the average difference of intra-day high and low of the index has been about 280.

Day trading refers to the practice of buying and selling stocks within the same trading day. The traders close all positions before the market closes to avoid the risk of price gaps—differences between the previous day’s close and the next day’s open price.

With the intra-day players away from the market, daily volumes—both in cash and derivatives—are going down drastically.

Volatility in equity markets could best be described as the standard deviation of the change in value of a stock universe in the market at a given time. Increase in volatility indicates an increase in risk in the market during the same period.

It also represents the “fear" in investor minds.

The standard deviation in price value of the Sensex in five trading sessions between 24 July and 30 July had been about 281, and that between 6 August and 31 July was about 266.

The standard deviation of the Sensex value during July was about 341. In contrast, in June it was just 198.

Chief executive of brokerage Arihant Capital LtdAshish Maheswari says: “The daily volume in the market has dropped hugely. The cash market volume, which is normally around Rs5,500-6,000 crore on a given day, has dipped about 40% to the range of Rs3,500-3,800 crore. Most of the day traders and even some institutional players are keeping away from the market due to high volatility."

George Thomas, a professional day trader at Motilal Oswal Securities Ltd, a local brokerage, also says that it is very hard to survive in what he calls a choppy market.

“A few intra-day traders were active in the market early this month, thinking that it has bottomed out. Many of them have lost their money. Every major fall in the market is usually accompanied by bouts of volatility. It’s best to wait and watch till the time the market becomes more stable."

Shah, who uses the trading terminal of Angel Broking, says that he has made nominal gains by trading on some shares which were rising but he does not want to dabble in the markets till normalcy returns.

His colleague Merchant also has made some profit in select stocks. “I hedged some of the risk by trading in the options market."

Pradip C. Doshi, who owns his namesake brokerage outfit at Mumbai’s Dalal Street, says an individual trader is simply not capable to ride successfully on extreme volatility unless he is very lucky."