The Invisible Czars
Today, the firm is noted for being ahead of rivals in using technology to gain trading advantage. Fund manager Devendra Nevgi, who had done business with Dolat for more than a decade, recalls that as early as 1998, the firm imported Korean keyboards with embedded mice to enable their traders punch in orders faster than their rivals.
The DNA Shapes Up
The 1990s also deepened the stock market. Trading in many stocks picked up and the opportunities for market making gradually diminished. That meant Dolat had to undergo another transformation. It had to shift its focus from market making to another growth opportunity. The firm chose to become an arbitrageur. “Those days, the regional stock exchanges were doing very well. We started looking at the arbitrage between BSE and the other exchanges,” says Shailesh. Dolat positioned traders across exchanges.
All of them would link up on phone on a real-time basis and exploit small diff erences in the prices of the same stock in two different exchanges. This was a naturally hedged trading strategy. That is, when the stock was bought in one exchange, it was sold in another. There was no net holding to carry over or capital locked in. “We don’t say we are investors. We don’t hold stocks. Whatever we do, we hedge it. We never want to carry risk on our books,” Shailesh says.
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Image: Vidyanand Kamat
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1970 Dolatrai tries to get BSE membership. Many members resist. Chairman Jeejeebhoy intervenes to give him his card. | |
Whether the Shah brothers planned it or not, Dolat had by this time developed a business model that cut across time, markets and asset classes. Dolat would take advantage of market inefficiencies. First, it was the low level of trading in some stocks that Dolat fixed through market making. Next, it was the gap between technology haves and have-nots that put Dolat at an advantage. Later, it was the lack of connectivity between exchanges that helped the firm engage in arbitrage.
Thus, the Shah brothers figured that the products Dolat dealt in might change, the markets might change, but the model of finding arbitrage in market anomalies would remain consistent.
“Our business is to seek risk-free returns,” says Pankaj. “We may not make 40-50 percent profit. We will make small profits, but we will not make losses.” At one point, the family even considered entering the diamond business, a source close to the brothers says. The idea was later buried because it did not fit the family’s fundamentals, the source says. The business of arbitrage involves taking small profits and a large number of positions.
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| Image: Vidyanand Kamat |
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Mid-1970s Dolatrai’s sons join him in business. The family builds a strong franchise in market-making.
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It is natural that an arbitrageur will have huge short positions to match his long positions. Whenever the market falls steeply, an arbitrage trader could thus be mistaken for a short-seller. Over the years, Dolat has been investigated several times for pulling down the market through short sales.
“We were a market maker in MS Shoes,” Shailesh recalls referring to the 1996 price-rigging scandal involving the shares of the footwear company. Again in 2001, when the tech bubble burst, investigators would not fail to haul Dolat on charges of short-selling and artificially depressing the market. Typically, these cases ended in a censure without making a serious dent into Dolat’s business. Eventually, the firm managed to convey to everybody that what it was doing was arbitrage and not short-selling.
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invisble peoples' contirbution to economy.
