How Infosys Stock’s Worst Trading Day In Six Years Played Out

Infosys Ltd. wiped out its yearly gains after an anonymous whistleblower letter alleged that its Chief Executive Officer Salil Parekh dressed up the company’s books. And the fall in shares was accompanied by a spike in volumes and delivery.

Asia’s second-most valuable software services provider recorded its highest trading volume of 9.02 crore shares on Tuesday, with 64 percent of the quantity traded being marked for delivery, according to data available on the National Stock Exchange. The trading volumes and delivery surpassed the previous highs touched on Aug. 18, 2017 when Parekh’s predecessor Vishal Sikka quit the company.

Shares of Infosys plunged 16.6 percent on Tuesday—the most in more than six years—after the letter from a group of “Ethical Employees” accused Parekh of unethical practices in “recent quarters” to boost short-term revenue and profits, according to a copy published by Deccan Herald newspaper on its website. While the decline wiped out more than Rs 50,000 crore of Infosys’ market valuation, it single-handedly dragged the Nifty 50 Index lower by 100 points. The stock’s weight on the benchmark gauge, too, fell to 4.94 percent from 5.7 percent.

Short Build-Up In Derivatives Market

The October futures of the stock witnessed heavy short build-up with open interest rising 32 percent, indicating that traders took short positions even at lower level.

Infosys, despite being available in the derivatives market, was locked in lower circuit in opening trade as it did not fulfill the exchange criteria of minimum 25 trades being executed by five different unique client codes. The circuit was lifted after the condition was fulfilled. This provided cash-future arbitrage opportunity to traders as the futures traded at a discount of Rs 35 to the cash market.

Infosys’ stock options were the most traded—1,52,826 contracts traded with call at Rs 700 strike price and put at Rs 600 strike price being most active in Tuesday’s trade. The October series ends on Oct. 31. Traders took short bets—writing call at Rs 700 strike price added 33.7 lakh shares and put at Rs 600 strike price added 26 lakh shares, indicating a support around the Rs 600-mark.

“The stock has posted a fresh 10-month low and the outlook has gone for a toss even on the medium- and long-term charts,” Hemen Kapadia of KR Choksey, said. “A 32 percent short build-up has led to a net short by the entire IT sector to the tune of 17.84 percent,” he told BloombergQuint. “The bearish gap between Rs 691 and Rs 760 will also provide a lot of resistance. The Rs 600 put and Rs 650 put have the largest open interest, indicating the possibility of further pressure. Stocks support levels in cash segment are at Rs 630, Rs 600, Rs 578, Rs 550 and resistance at Rs 660, Rs 679, Rs 700.”

Amit Shah, investment analyst at BoB Capital Markets Ltd., said, “A break below Rs 620-600 can invite more selling pressure in the stock towards Rs 545, as the stock is now likely to encounter more volatility in coming times considering the uncertainty. The comfort for the stock lies above Rs 720 on sustained basis.”

Mysterious Trade

The whistleblower letter dated Sept. 20 also raised suspicions of insider trading. Around 18 lakh shares were added at Rs 740 put strike of November series on Sept. 25. The notional value of this position is nearly Rs 142 crore and the buyer of this put would have paid about Rs 4 crore, as premium on that strike was around Rs 22.

The large position was taken by a FII client of an MNC Bank, a trader told BloombergQuint on the condition of anonymity. It’s unlikely for an institution to take such a big naked short position. With share price of Infosys already up 20 percent for the year ahead of earnings, in all likelihood the position looks like a protection buy by the FII client, the person said.

Usually in such cases the client’s bank provides liquidity and becomes a market maker for such trades. The trade is still open as there was no unwinding on the strike, but premium went by 500 percent to close at Rs 103, the person quoted above said.