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Bulls, Bears and other Beasts by Santosh Nair

Margin Of Errors

Owing to the fantastic run-up in share prices, there were plenty of mini-operators known as jockeys who gained plenty.


The engines of the economy were running at full power and tax collections were at a record high. Over the years, Lala had developed his own set of indicators to warn him about the impending danger in the market. The ease of money-making was one of them. It was a given fact that the bubble would burst soon, the only question was 'when'.


By October, the Sensex had reached above 20,000. The largest-ever IPO in the history of the Indian stock market, Reliance Power was also introduced that year. There was a gigantic build-up of leveraged positions in the futures and options market. Even though Lala was wary of going short on the market, he began reducing his trading positions from December onwards. Lala knew that a misstep at this stage of his career would set him back a few years.


Lala had been thinking of putting some money in the Reliance IPO himself but looking at the madness around him, he had wondered whether that would be a good idea. The market had started to overheat and a correction looked imminent. Everywhere, retail investors and HNIs (high networth individuals) were pulling money out of their trading accounts to invest in the Reliance Power IPO.


Taking up an extremely bold gamble, Lala had decided to short Nifty futures as heavily as possible. The Sensex and the Nifty began tumbling down. All around brokers and investors had started to panic and the proverbial tide of liquidity that had lifted every boat of the market suddenly seemed to have drained away as people started incurring losses after losses. Most of Lala's fellow traders were scrambling around for cash. However, unknown to them, Lala was sitting on a handsome pile of profit.

The government had to swing into action to calm the agitated market players. Banks were asked to extend additional credit lines to brokers and people were assured that there would be enough liquidity in the system. With an almost 25% dive from its peak over just seven sessions, the bull market appeared to be over. 


Lala on the other hand had made the boldest bet of his career and had emerged victorious. His satisfaction lay in the fact that he had stood up against the market right in the midst of a raging bull run and came out on the top.


The final act of the tragedy of the market was still pending. Reliance Power's debut was still two to three weeks away. The first indications that the stock's listing could be an anticlimax of sorts had come from the grey market. Investors in the issue had believed that they could make a decent return. It seemed that the market had begun to stabilize in the run-up to the listing and many players felt that the worst was over.


Minutes after its listing, RPower’s share price sank. Only a handful of investors managed to exit their positions at a decent profit. In the grey market, many players reneged on their commitments. The grey market was illegal and therefore nobody could drag anyone to court. 


The market began to trend even lower every time it attempted to climb after a bout of selling. 'Borrowed' short sales, while earning handsome profits for FIIs, further collapsed share prices. Short-selling tested a trader's nerves in a way that going long did not.


In a span of just six months, three of the Big Five US investment firms - Lehman, Merrill, and Bear Stearns - had become history and the surviving ones - Goldman Sachs and Morgan Stanley had changed in character.


There followed an even more brutal sell-off in October which was triggered by the appreciation of the Japanese Yen against the Dollar. The double whammy of a rising yen and falling asset prices set off a vicious cycle, the tremors of which were felt across financial markets all over the world.


Lala's performance up till September was average but he had been perfectly content with the way things were working out for him.

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