What is ALBM? How does it work?

ALBM is an acronym for automated lending/borrowing mechanism. It is a stock-lending product introduced by NSCCL (National Securities Clearing Corporation Limited) with the primary objective of providing a window for trading members of NSE to borrow securities/funds to meet their pay-in obligations. ALBM sessions are held every Wednesday for weekly markets and every day for rolling market. ALBM trades are carried out at a spot price called “Transaction Price”(TP), while positions are reversed at a benchmark price called “Securities Lending Price” (SLP). The difference between the SLP and the TP is the return from borrowing or lending funds or securities. ALBM is a means of facilitating sophisticated trading strategies giving good returns.

Let’s take an example to demonstrate this mechanism:

A is a trader who has short sold Infosys. He wants to carry forward his position but as the settlement has ended, he must meet his delivery obligation. Trader B holds shares of Infosys. He does not want to sell but at the same time, he wants to maximise returns on his portfolio, taking advantage of whatever opportunities come along.

On the ALBM session on Wednesday, the SLP for Infosys is, say, Rs.8000. Trader B places a sell order for 100 shares of Infosys at Rs.8040 (transaction price). Trader A looking for an opportunity, grabs the shares and the transaction is executed. In effect, Trader B has lent 100 shares of Infosys to Trader A for a fee of Rs 40 per share. Trader A pays Rs 8,00,000 (Rs. 8,000 x 100) as collateral and Rs 4000 towards fees for the loan of securities. In the process, Trader B gets a weekly return of 0.50% or 26% annualised.

Is ALBM similar to carry forward?

This may sound suspiciously like carry forward. But there are some major differences between a carry forward transaction and stock lending transaction.

carry forward is a leveraged transaction, where the investor has to pay 10 to 15 per cent margin. Stock lending is a 100 per cent margin transaction.
carry forward positions can be rolled over for a maximum period of 90 days. In the case of stock lending, the positions have to be settled within a nine-day period.
carry forward market is characterised by the absence of institutions. Advent of stock lending will bring institutions also into the carry forward market. This will improve the carry forward market.
What is hawala rate?

Hawala rate is a making-up price at which buyers and sellers settle their speculative transactions at the end of the settlement. It is the basis for buy and sell for the investor opting for carry forward during the next settlement. This price is fixed by taking the weighted average of trades in the last half-an-hour of trading on the settlement day for securities in the carry forward list, also known as the “A” group or specified group. This price is significant because for a speculative buyer or a seller, the hawala rate is the standard rate for settling his trade and for carrying forward business to the next settlement.For example, An investor buys the stock of X company at Rs.100 on Monday. By Friday ( BSE settlement day), if Rs.90 is the weighted average price in the last half-an-hour, the buyer would have to carry forward his trade at this price of Rs.90. He then settles at Rs.90 and enters into a contract at Rs.90 plus BLESS charges for the next settlement.

Can the Stock Exchange fix or alter the hawala rate?

Normally, Stock Exchanges do not interfere with the hawala rates. However, there are instances, when rates have been changed to ensure safety of the markets. This is so because in case the market witnesses a sharp fall during a settlement, the chances of a broker default are extremely high. This is when the Exchange administration steps in and raises the hawala rate to avert any possible default.

What is Arbitrage?

Arbitrage is an act of buying assets (or securities) in one market and selling in another at higher prices. It takes advantage of a price differential existing in the prices of the same commodity or security in two or more different markets. By this process, undervalued assets (or securities) are sold in related markets, which are temporarily out of equilibrium. It should be understood that unlike speculation, arbitrage is risk-free as opposite positions (i.e long-short) are taken simultaneously, leaving no uncovered position.

Since Indian Stock Exchanges trade the same stocks with different settlement periods, there are many opportunities for arbitrage.