Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

MV Short Take: Markets Crash From FII Selling?

At JagoInvestor recently, Manish wrote a post on whether there is a stock market crash on the way. Manish quoted me:

However, not everyone agrees to this argument. “FII’s have invested around 50,000 crores in Indian markets from the point when Nifty was around 5,400 last time, which was around Aug 2010,  However FII’s have sold taken out just 15% of what they invested, and right now we are at the same levels , so still lot of FII’s money is lying around.

So, the biggest reason for the fall is the fear of rising inflation and interest rates and the way it will affect our markets and economy in coming days”- says Deepak Shenoy of .

I thought I would clarify – and perhaps the best way I know is through video at MarketVision’s Short Takes. Here’s a five minute short take on the subject – Is FII Selling Responsible for the Market Crash.

Let me even embed this video:

Would love your comments!

  • Mahesh. says:


    Wonderful video….Market will reach pre election level.


  • Anonymous says:

    >Deepak, good analysis as usual. Ya u r right its not the FIIs alone who r responsible for the crash. With so many years in market u must have realized that other than FII the only market moving group is the cartel of close knit really big operators (who collude with FIIs in any market move (especially the veteran FIIs know that to make money in this country they have to be in league with this group. They heavily front run FIIs on both upside and downside. Yes they are more influntial factors than DII's (MF +Insurnace) in the Indian Market. MF's are bleeding (heavy redemptions since last few months) and Insurance Companies have seen much lower collection in market linked products due to reduced commission + the way they place their orders (typically limit orders and slow decision making) doesn't move the market. So they have never been the market movers. Their figures are more academic than anything else. Yes even today's FII figures (100 crore buy in cash, 300 crore buy in stock future and 400cr sell in Nifty Future) doesn't at all explain today's 400+ points fall and it could not be the selling of all the retail participants of the country combined (and even DII were net buyers). So only one thing can explain this- selling by big gun operators (who r regulars on all business channels at every fall saying – India is in a long term structural bull market 🙂 ) who because of regular cartilization with big and old FII's know that their fund flow in not going to be positive in near future hence are having a free shorting ride. they r safe till FIIs fund flow reverses and they will front run there too. In return they let some of these FII employee buddies (most of them r expats) make money in their personal account on individual scrips over which they have full hold (because of limited floating stock or where they r in collusion with promoters)which is more than the salary they will ever receive
    Yes their can never ever be any documentary evidence or proof of this ( as u mentioned in one one of ur posts something of the sort – due to lack of evindence") but this is the dark reality of Indian markets which is more important than technical or fundamental analysis.

  • Amit says:

    >Hi Deepak,
    I find your analysis making some fundamental incorrect assumptions. Maybe it is my lack of market technical buzzword savvy, but here goes:

    1. There is a flaw in the histogram method. FIIs need not sell a large amount to be the cause of the crash. Consider the following scenario. For simplicity, I would treat Nifty as a single share :

    a. FIIs think Nifty is worth 6400
    b. Non-FIIs think Nifty is worth 5400
    c. FIIs stop buying, and sell a single Nifty stock (actually, a single share of all Nifty constituents). This much of selling would be less than a pixel on your histogram.

    The above scenario is sufficient to bring down Nifty from 6400 to 5400. And FIIs could be considered a "cause" of this crash, by selling just Rs. 50,000 (by a totally wild guess, average Nifty share price is 1000, so to sell a single share of each Nifty constituent would need a selling of 50,000.)

    2. No buying? Selling must be accompanied by buying, otherwise it is called "dumping the shares in a gutter", not selling. Dumping is an off-market process, so BMC would have more details about this than BSE/NSE ;). See for full treatment of this subject.

  • Deepak Shenoy says:

    >Amit: While that logic holds for a tiny closed system, it fails in the larger case (where there are a massive number of players). The frenzied buying by FIIs was accompanied by buying by common retail investors as well, and on the way down, there were other players selling too. And they were just as important (or more so) to the fall – in fact, news is coming in that NRIs probably sold a lot more. Let's see.

    2) I'm sorry if I said "no buying" – it was about not enough buying. When you have more sell volume than buy volume, sellers get desperate and drive down prices. Of course there were buyers at SOME price, but that was much lower than the market price then – which is why the buy/sell equation is tilted.

    True, for every seller there is a buyer, but the sellers seem to want to dump shares at any price. Which is strange.

  • Amit says:

    >1. I am not saying that the scenario I quoted is exactly true. This scenario is an extreme, akin to reductio ad absurdum. But it is clear from it that selling less can also cause a big crash. Even if FIIs bought a lakh crore in last year, they don't need to sell all of it to cause a crash.

    2. It seems to me that the foundation of your theory is arithmetic mistakes like "When you have more sell volume than buy volume". This is impossible. Sell volume is ALWAYS equal to buy volume.

    3. See the price matching algorithm of a stock exchange. It doesn't consider volume at all. Why then, do all your explanations of price movements boil down to who bought more, and who sold more? What you should ask is – at what price?

  • Deepak Shenoy says:


    1) It would make sense in a void, but there are other players, no? I'm saying that the crash is not all about FII selling, or even a majority; markets are falling from other reasons, such as Indian domestic investors not buying, or because perhaps NRIs are exiting. FIIs aren't entirely to blame for the fall.

    In fact FII selling is not very big in the overall context, historically. It could increase (and look at 2008 Oct to see how much) and THEN it might be a major reason.

    2. You are right that sell and buy volumes are the same, and my wording was wrong there. You could look at it as sell order volume, not sell execution volume that I'm talking about – and then, the desperation of the seller.

    But this is getting knickers in a twist. The supply is greater than demand, so prices go down. Technically supply will always seem equal to demand, at an exec level. But you and I know what we're talking about – the fact the selling pressure is higher because sellers are more desperate, and will sell at a lower price.

    3) Of course price matching algos do volume. You take the order volume at the bid and the order volume at the ask, and execute at the lower volume.

    If you look at the algo of a market order that demonstrates the point. A market sell takes the price much lower than a market buy of the same size, where there is selling pressure – funda being, the bids are lesser in volume and perhaps more widely spread out (or both). This happens on the way up as well when there is sparse sell order volume.

    Regardless of the volume, the "at what price" matters of course. But it's a derivative of "selling pressure"; there is only selling pressure if people are willing to go down a lot in order to execute.

    I don't know why we're getting into technicalities – I could rephrase it to be technically accurate but completely un-understandable. I'm speaking at a supply-demand level, and you're trying to correct the way it's phrased – whether I say sell volume or sell volume at what price. It doesn't matter – the reader needs to get a sense that selling pressure is driving prices down; beyond that it's just syntax.

    The fact is that people attribute FII selling to be the major reason for the fall, but I'm not convinced; I'm saying there are other reasons we overlook because FII sales aren't much.

  • Amit says:

    >I thought the theory could be described in a way which is consistent with elementary arithmetic. But it is totally your prerogative if you don't want to reword your statements.

    In general, I would not mind a few liberties with language. But in this case, I think this is the cause of a logical mistake.

    For example, if someone repeatedly, mistakenly calls "traffic accidents" "speeding incidents". Even after attention being drawn towards it. Then if he analyzes traffic accidents, and concludes high-speed cars are not to blame. His analysis would be difficult to understand for a reader who realizes that though related in some sense, "traffic accidents" and "speeding incidents" are far from being the same thing. The analysis might be right, or wrong. But reader would get confused by the liberty with language.

    Similarly, you repeatedly, mistakenly call "market decline" "too much selling". Ignoring elementary arithmetic. Obviously you are going to look into share sales when analyzing market crash.

    Anyway, I am not saying FIIs are to blame for the crash. I am just saying your reason for this has some logical mistakes.

    And yeah, I was wrong about price algos. Though it is only for computational efficiency they deal in batches and hence take volume into consideration. But conceptually, they just try to behave as if a single share is being sold at a time i.e. the most elementary, brute-force, O(n), but rigorously correct algo . So volume can be immaterial for price determination.

  • Deepak Shenoy says:

    >Amit: You may have a point, and perhaps the appropriate language must be evolved, which can specify a supply-demand mismatch without confusing the user with technicalities. There will always be users who find it difficult to deal with ambiguous language – because technically, you can't even say "stock falls due to heavy selling" according to proper logic. But it conveys the correct message.

    The concept of a "speeding incident" in your terminology may still be a speeding incident, just that the reader thought speeding was 80Kmph, but actually it was 40kmph in a 10 kmph zone; in my post's context, the concept is still that sustained selling causes a crash, but the word's "more sellers than buyers" can throw you off. Fair enough.

    I must disagree about volume being immaterial for price determination; volume is a significant piece – you might look at information as a trade-by-trade basis and say it gets executed without looking at volume. (again not true, because a market order of 1000 shares may get exec'ed at a different net price than a market order of 100 shares). But if you step one level out and see price movement, a big influencer is volume (also type of orders, order book depth etc.)

  • PK says:

    >I am not sure whether researching on FII selling must be analyzed with their ownership information of stocks, which is also not readily available.

    Even then there is possibility that ownership of FIIs might remain constant(they just change hands from 1st FII to 2nd FII) but price levels of stocks drop causing crashes to happen.

    To me crashes are like money is sucked into vacuum. Am still not able to buy the logic described, and everyone describes it in this fashion only.