Huge margin calls triggered free fall

Pending sell orders from hedge funds accentuated the pressure to sell.

Do not blame it all on the Left. The dramatic collapse in the Bombay Stock Exchange (BSE) Sensex yesterday had its origins in Friday's 330-point decline that triggered huge margin calls on brokers and investors.

This, in turn, forced them to sell heavily to raise cash, setting the stage for a hugely negative start today. The Sensex opened 100-150 points below Friday's close, which made the subsequent 842-point intra-day crash and two trading stoppages a self-fulfilling trend.

Says a leading broker, "The selling pressure came mostly from people facing margin calls "" financiers who were heavily exposed, and retail investors who began to panic." Market sources also spoke of pending sell orders from hedge funds, which accentuated the pressure to sell.

In yesterday's trading, there was no hint of panic till the Sensex fell 200 points, but around this point cascading margin calls forced speculators and big investors to keep selling in order to raise cash.

The pressure came not only from the stock exchange authorities "" who were fighting to prevent overexposure that could have caused settlement problems "" but also from banks making margin calls against loans.

With margins as high as 80 per cent being called for, the market saw only sellers most of the time.

Exit opportunities dried up when the market went into freeze mode after falling 10 per cent. As the Sensex hit the first circuit breaker, trading was suspended for an hour.

It resumed at 11.15 am, only to see further sell orders. That is when the Sensex hit the second circuit breaker at 15 per cent -- and it was back to cool-off mode.

This continuous decline should have enabled bargain hunters to enter the market, but with the terminals of many brokers on the National Stock Exchange switched off, not many could buy at lower levels.

A further damper to sentiment was the selling pressure in the futures and options market, where several positions were being squared off in a hurry.

The recovery in the Sensex, which came when the market resumed trading for the second time was largely on account of domestic institutions stepping in with large buy orders.

The buying, which saw the Sensex recover nearly 400 points, gave investors the opportunity to square off their positions. This led to further declines, with the Sensex closing down 564 points.