Dynamism of Low Frequency Trading For Traded Equity Shares With Reference to Bombay Stock Exchange in India

INTRODUCTION

Bombay Stock Exchange (BSE) is a capital market where the listed securities are traded. BSE was established in 1875 and it is Asia‘s oldest stock exchange. BSE is the world‘s 10th largest stock exchange with an overall capitalization of more than Rs 1,27,06,528.94 Crores as on 31-05-2017.Numerous trading frequencies take place in a trading day. One buys shares when market opens and sells them on the same trading day to gain profits or holds shares to next day or week or month. There are three factors involved in securities trading namely trading frequencies, share price change and number of shares traded. Here, trading frequencies are considered as independent variable whereas share price change isa dependent variable. It is contemplated that the low frequency trading has negative impact on share price change in trading month. Further, lower trading cost, minimum taxes, avoidance of falling prey to forecasting, etc. are the benefits of low frequency trading in equity market.

A Stock Exchange is a marketplace where shares change hands for a consideration. A stock market provides an opportunity to raise funds by a company whose shares are listed with a particular stock exchange per se BSE.BSE 30 Sensex consists of shares of 30 well-established and financially sound companies listed on BSE. These BSE 30 companies are called as blue-chip companies. BSE 30 companies belong to various sectors of the Indian Economy and shares of these BSE 30 companies are the largest and actively traded shares. It is interesting to note that the full market capitalization was about Rs 1,27,06,528.94 Crores as on 31-05-2017. Index is calculated on the basis of free-float capitalization method, a variation of market capitalization method. According to free-float capitalization methodology, level of index at any point of time reflects free float market value of 30 component stocks relative to base period. Market capitalization of a company is worked out by multiplying the price of its stock by number of shares issued by corporate actions, replacement of scripts. The term ―Equity Market‖ refers to a market where shares are traded, either through a stock exchange or over-the-counter market. Equity market provides a platform to companies to access to capital and investors, a slice of ownership in a company with potential to realize gains based on its future performance.

Shares are traded on BSE and hence trading frequencies i.e. buying and selling transactions take place in a trading day. During the course of buying and selling transactions, the securities change hands for a consideration. Further, trading frequencies are generally more during bullish hours whereas trading frequencies are lower during bearish hours. The bearish hours lead to low frequency trading. The demand and supply decide share price change. The higher the demand, the more is share price change. On the other hand, the lower the demand, the lower is share price change. Hence, it is assumed that the low frequency trading has negative impact on share price change in a month. It is clear that share prices of a few BSE 30 companies are higher than the share prices of the majority of other BSE 30 companies. The low-income investors cannot afford to invest in such higher price shares. Rather, they prefer to invest in more shares of lower share price. Low frequency trading is affected by the higher share prices. Sometimes, investors or brokers being risk-averse may hold shares for long duration to realize capital gains. So, when shares are held for long term, they may have low frequency trading. Low frequency trading is a barrier to equity market development and also to foreign investors. On the other hand, shares having low frequency trading are associated with low returns and argued that low frequency trading are due to signals of bad news in the market and thereby share prices were slowed down. Thus, it is concluded that low frequency trading generates low returns than high frequency trading. Among the blue-chip shares like BSE 30 companies shares, some of them have high frequency trading and few have low frequency trading in a month.

OBJECTIVE OF THE STUDY

The main objective of the present study is to examine the impact of low frequency trading on equity market with reference to BSE in India from January, 2017 to May, 2017.The low frequency trading and share price change are considered in the study.

This is an analytical study based on the secondary data collected from www.bseindia.com, the official website of Bombay Stock Exchange for a period from January, 2017 to May, 2017. Three low frequency trading of BSE 30 companies in each month are considered for analysis and interpretation purpose. These three low frequency trading are examined to assess the impact on share price change in a month. Therefore, the following hypothesis is set for the present study. In this study, number of trades done on BSE 30 equity market are considered as frequency trading in a month. The low frequency trading is independent variable whereas share price change is a dependent variable. The hypothesis is tested to accept or reject whether low frequency trading has a negative impact on share price change during the study period.

SIGNIFICANCE OF THE STUDY

The present study throws an insight into the impact of low frequency trading on equity market with reference to BSE 30 companies. The low frequency trading influences on share price change during a month. Hence, the analysis of information may be used by potential investors to take investment decisions with regard to investment in shares having low frequency trading but positive share price change.

LIMITATION OF THE STUDY

The present study is limited to the impact of low frequency trading on equity market with reference to BSE 30 companies. Hence, the information analysed and interpreted covers only two variables namely low frequency trading and share price change from January, 2017 to May, 2017 and it may not reveal the impact of low frequency trading on other variables associated with trading activities.

REVIEW OF LITERATURE

Some studies have been carried on frequency trading with regard to shares. Trading frequency is defined as the number of days in which a share shows price change to the total number of trading days within the market. Some of the following studies have been reviewed for the purpose of this study as under. Minovic (2012) found that existence of infrequently trading shares is a barrier for stock market development and also to foreign investors. Further, he highlighted that investors chose not to trade when cost of trading is higher than the benefit that would result in zero or negative returns. Oprea D (2015) observed that shares which are infrequently traded may be associated with long term holding stock by investors or brokers who are risk-averse, and this directly results in illiquidity of shares and vis-versa. Reuters (2015) reported that the threshold trading frequency for developed markets is 90%, emerging markets 80% and frontier markets 50%. signals of bad news, which slows down the price of stock. The investors traded more frequently when there was good news. Further, their study emphasized that volatility also increases when trade intensity increases but this finding is only restricted to high frequently traded shares referred as blue-chip stocks. Busse et al. (2017) found that those investors who trade frequently generate abnormal returns than those who are traded less frequently His study overlooked to address the situation when many investors are traded on the same companies. Further, the study found that shares which were frequently traded generated higher returns compared to shares which were infrequently traded. In this study, only three low frequency trading of three companies out of BSE 30 companies are examined to study the impact of low frequency trading on equity market with reference to BSE in India. Therefore, share price change is matched with low frequency trading to examine its impact. Analysis and Interpretation of data from January, 2017 to May, 2017 In this study, the secondary data collected from www.bseindia.com is compiled, presented in table forms and analysed and interpreted. The values of independent variable i.e. low frequency trading and one dependent variable i.e. share price change are examined. Only three low frequency trading in a month are analysed and interpreted to examine the impact of low frequency trading on equity market with reference to BSE 30 companies for the period of five months from January, 2017 to May, 2017. Share Price change = Closing price minus (-) Opening price. Therefore, Opening price means price of a share at the beginning a particular month and Closing price means price of a share at the end of the same month. Price change (%) = (Price change/Opening price) * 100. Information relating to frequency trading and share price change of BSE 30 companies for 23 trading days in January, 2017 is presented in Table No: 1.

Information relating to frequency trading and share price change of BSE 30 companies for 20 trading days in February, 2017 is presented in Table No: 2.

Information relating to frequency trading and share price change of BSE 30 companies for 21 trading days in March, 2017 is presented in Table: 3.

Table: 3 depicts the frequency trading of BSE 30 companies‘ shares during 21 trading days in March, 2017. Hence, the first three low frequency trading of three companies are selected for analysis and interpretation purpose. Among these three companies selected, Nestle India has the lowest frequency trading i.e. 46,520 trades and its share price jumped up by Rs 531.85 (3.37%). This is followed by the second lowest frequency trading i.e. 69,844 trades of Bajaj Auto but its share price fell by Rs –865.55 (- 29.95%). The third lowest frequency trading i.e. 80,054 trades is reported in respect of Ultra Chem Co and reported a fall in its share price by Rs –965.45 (- 22.88%) during 21 trading days in March, 2017. Information relating to frequency trading and share price change of BSE 30 companies for 18 trading days in April, 2017 is presented in Table No: 4.

Table: 4 demonstrate the frequency trading of BSE 30 companies‘ shares during 18 trading days in April, 2017. Hence, the first three low frequency trading of three companies are selected for analysis and interpretation purpose. Among these three companies selected, Nestle India has the lowest frequency trading i.e. 30,854 trades and its share price jumped up by Rs 1603.70 (9.84%) and followed by Ultra Chem Co with the second lowest frequency trading i.e. 44,538 trades and its share price jumped up by Rs 278.25 (8.55%). Further, the third lowest frequency trading i.e. 52,553 trades is reported in respect of Power Grid and an increase in its share price by Rs 3.05 (1.92%)during 18 trading days in April, 2017. Information relating to frequency trading and share price change of BSE 30 companies for 19 trading days in May, 2017 is presented in Table No: 5.

Table 5 shows the frequency trading of BSE 30 companies during 19 trading days in May, 2017. Hence, the first three low frequency trading of three companies are considered for analysis and interpretation purpose. Among these three companies selected, Nestle India has the lowest frequency trading i.e. 39,928 trades. Consequently, the share price of Nestle India eroded by Rs – 372.25 (-2.08%). This is followed by the second lowest frequency trading i.e. 53,765 trades in respect of Bajaj Auto, the share price of which jumped up by Rs 84.30 (3.21%). The third lowest frequency trading i.e. 58,474 trades is reported in respect of NTPC, the share price of which gained by Rs 2.40 (2.52%) during 19 trading days in May, 2017. Information relating to three low frequency trading of BSE 30 companies from January, 2017 to May, 2017 is presented in Table No: 6.

Table 6 presents the three low frequency trading in each month under study. Among three companies having low frequency trading, Nestle India has the lowest frequency trading in all the five months trading period and its share prices witnessed the positive returns(i.e. Rs 540.90, Rs 415.55, Rs 402.40 and Rs 1,526.10 respectively) in the first four months. However, its share prices witnessed the negative returns (i.e. Rs – 165.15) in May, 2017. Further, the share prices of Nestle India if compared with the share prices of the rest of BSE 30 companies are the highest. Therefore, the small investors do not afford to invest in the shares being traded at the higher prices like Nestle India. Hence, it is concluded that the low frequency trading has positive as well as negative impact on share price change during the study period.

Hypothesis = Low frequency trading has negative impact on share price change during the study period. The analysis revealed that the low frequency trading has positive as well as negative impact on share price change during the study period as shown under.

Table No: 7 shows whether the hypothesis is accepted or rejected during the study period. The hypothesis is rejected in case of Nestle India in the first four months i.e. January, February, March and April, 2017 whereas it is accepted in May, 2017 and in case of Bajaj Auto, the hypothesis is accepted in the first three months i.e. January, February and March, 2017 but rejected in May, 2017. Further, the hypothesis is rejected in case of Hero Moto Corp in January, 2017 and in case of Ultra- Chem Co, the hypothesis is accepted in February and March, 2017 but rejected in April, 2017. The hypothesis is rejected in case of Power Grid in April, 2017 whereas in case of NTPC rejected in May, 2017. Hence, it is submitted that low frequency trading has positive as well as negative positive impact on share price change on BSE 30 companies during the study period.

FINDINGS

The analysis and interpretation of data pertaining to low frequency trading on equity market with reference to BSE in India has revealed that low frequency trading has positive impact as well as negative impact on share price change among BSE 30 companies during the study period. The following are the major findings of the present study. The low frequency trading has positive impact on share price change in case of Nestle India in January, February, March and April, 2017 and negative impact in May, 2017. i. The low frequency trading has negative impact on share price change in case of Bajaj Auto in January, February and March, 2017 but positive impact in May, 2017. ii. The low frequency trading has positive impact on share price change in case of Hero MotoCorp in January, 2017 and in case of Ultra Chem Co, negative impact in iii. The low frequency trading has positive impact on share price change in case of Power Grid and in case of NTPC in April, 2017 and in May, 2017 respectively.

SUGGESTIONS

It is observed that the low frequency trading has also positive impact as well as negative impact on share price change during the study period. Hence, it is suggested that investor may trade more in those equity shares which generate more market return in trading month. In some cases, though the share price is less and few numbers of shares are traded, the market returns are negative. Hence, more shares may be traded to generate higher market returns.

SCOPE FOR THE FUTURE STUDY

The future study may be undertaken to examine the impact of low frequency trading on equity market with reference to BSE 30 companies on daily or weekly basis covering more variables.

To conclude the discussion, the study reveals that the low frequency trading has positive impact as well as negative impact on share price change during the study period. When the low frequency trading has negative impact on share price change, the hypothesis is accepted and rejected when the low frequency trading has positive impact on share price change. Hence, the hypothesis is rejected in case of Nestle India in the first four months i.e. January, February, March and April, 2017 whereas it is accepted in May, 2017 and in case of Bajaj Auto, the hypothesis is accepted in the first three months i.e. January, February and March, 2017 but rejected in May, 2017. Further, the hypothesis is rejected in case of Hero Moto Corp in January, 2017 and in case of Ultra Chem Co, the hypothesis is accepted in February and March, 2017 but rejected in April, 2017. The hypothesis is rejected in case of Power Grid in April, 2017 whereas in case of NTPC rejected in May, 2017. Hence, it is submitted that low frequency trading has positive impact as well as negative impact on share price change on BSE 30 companies during the study period.

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H.O.D., Dr. D. Y. Patil Institute of Management and Entrepreneur Development, Pune