Working on a paper for an event in IIMB. Puttin here the abstract of it. The paper is titled Derivatives, manipulations and retail investors in India

Today the institutional investors and high net individuals dominate the Indian capital market scenario. The participation of the retail investors in the capital markets is limited. The reason could be traced back to a lot of incidents in the past where retail investors were hit badly and lost confidence in the capital markets. Typical incidences include Harshad Metha scam, Kethan Parek scam, UTI64 debacle and more recently the Manic Monday.

In order to make Indian capital market a true financial powerhouse participation of retail investors is crucial. SEBI and the government have come up with a lot of actions to control manipulations, encourage retail investors to participate and to improve liquidity. Things like introduction of derivatives, MAPIN, reduction in capital gain taxes, allowing banks to invest in markets, transaction tax to discourage speculation and a lot more are positive signs.

Indian capital markets have been hailed for its constant reforms and introduction of new instruments among the developing nations. Introduction of derivatives was one among them. There is no doubt it has improved liquidity in our markets. But has it improved enough liquidity to make sure they (derivatives) themselves dont become an instrument of manipulation.

Now when sensex is roaring and when retail investors want to take part what stands in-between? Today manipulations of size of harshad metha or ketan may not be that easy with the restrictions and discipline brought by SEBI. But even now manipulations of small magnitude and duration are done by the big speculators every day. There is nothing illegal about it. The reason they happen is due to the lack of liquidity and availability of more instruments for manipulation. These are the biggest dangers that stand before a retail investor. These can hit them very badly day on day and more importantly they may not even come know what happened.

The paper looks at the impact of the introduction of derivative in India in 2001, has it brought in the liquidity needed to our markets? And how it has enabled manipulations. The paper also looks at a particular short-term pattern of activity in futures market and equity market together and tries to bring out one way of how short-term manipulations are done using derivatives. How this could be dangerous for a retail investor and how it can be avoided thus making the place safe for retail investors. This would improve the all important retail participation, which will make our capital markets a real financial powerhouse.