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Prop traders use SLBM reverse arbitrage on discounted IT stock futures
India’s NSE SLBM lets traders borrow shares for a fee of 3% to 5% and then short cash while buying futures at a discount, locking in annualized gross returns described as high single- to double-digit.
LiveMint Markets describes a strategy, known as reverse arbitrage, in which proprietary traders use India’s NSE stock lending and borrowing mechanism, or SLBM, to profit from a gap between cash prices and futures prices for IT heavyweights such as Wipro, HCL Technologies, Infosys and Tata Consultancy Services.
According to the report, SLBM allows investors to lend shares held idle in demat accounts to borrowers for a fee of 3% to 5% of the share value for periods ranging from one or two months or more. The mechanism also enables traders to short stocks by borrowing them first, because SEBI does not otherwise permit naked short-selling.
LiveMint Markets says the opportunity has emerged as IT sector underperformance left futures contracts trading at discounts to their underlying shares. It attributes the underlying weakness to money moving out of domestic IT companies into overseas firms tied to the AI trade, and notes that while futures normally trade at a premium due to cost of carry, bearish sentiment or corporate actions such as dividend payouts can push futures into discount.
To execute the trade, the report says traders borrow IT stocks through SLBM from HNIs and foreign portfolio investors, sell the borrowed shares in the cash market, and simultaneously buy the matching futures contract at the lower price. As spot and futures converge at expiry, they take delivery through futures positions, locking in the spread until settlement.