The Indian stock markets are falling like a pack of cards. Inflation is high and the rupee is touching a new low every day. Many are blaming Europe for the present problems with the Indian markets. Greece is facing a choice between austerity or an exit from the Euro. If Greece opts for an exit what will happen to the world?

KhanAcademy.org realized that more and more people are becoming curious about the problems faced by Europe and how that is affecting their ability to purchase their daily bread. They went ahead and created some amazingly good videos about the Greek crisis. We picked up three of them that we believe are very relevant in the present condition:

Greek Debt Recession and Austerity

Why Europe is worried about Greece?

How and why  Greece would leave the Euro?

If you have interesting videos or articles that you come across on the net please let us know through your comments.

The last two years have seen many incidents where computers have been blamed for extreme volatility in the financial markets across the globe. Indian markets have also seen some incidents where algorithms have been blamed for volatility. The most recent one happened on April 20, 2012.

Last Friday, the Nifty was down by 7 percent or 300 points which panicked the equity markets throughout the week. It was also the day when Infosys futures went down by 20 percent in a single day before it recovered. Traders blamed algorithms and called this the Indian version of the Flash Crash that was experienced on May 6, 2010, when the Dow Jones crashed by 1000 points or 9 percent, but managed to recover within minutes.

The official report by the SEC blamed a single large trade in E-mini S&P 500 Futures by a mutual fund that led to large buying and selling of the same contract by high frequency traders due to which the E-mini price was down 3 percent in four minutes.

In the Indian context, the blame has fallen on a broker who put in large orders on the Nifty contracts without specifying price limits. These were large orders that ended up as market orders and due to the lack of specific price details, these trades were executed at the best available price. A mint report (http://www.livemint.com/2012/04/23204454/Another-flash-crash-another-a.html) states that it was a foreign broker who put this order and it was unlikely that this order was sent manually into the system.

The name of the broker is not yet public. But another story goes that the broking firm is basically a prop trading house which operates out of Mumbai and specialises in derivatives products. It is believed that this firm ran an options strategy which led to the present crisis. It was an arbitrage between futures and options where orders were executed wrongly.

Though the stock of Infosys also crashed by 20 percent on the same day and the exchange wants to play it safe by not connecting the stock future and the Nifty futures, it cannot be dismissed that this could have been a part of the strategy. In any case, Infosys has the highest weightage at 8.47 percent in the Nifty Index and this connection in the present crash cannot be ignored.

Sandeep Tyagi of Estee advisor runs an arbitrage fund out ofDelhiwhich is completely based on algorithms. He feels that algorithms are being unnecessarily blamed for the present situation. When the markets started to crash on Friday afternoon, his algorithm did not go overboard to sell the Nifty when the market witnessed a free fall. “I’m running a fund that is based on algorithms. We did not really experience any extreme reaction from our fund so I won’t really blame the algorithms. This looks more like a manual error to me,� he says.

Tyagi feels that if all brokers or traders follow a simple checklist for algorithms, then situations like the present flash crash can easily be avoided. He puts thrust on price, value, open positions, real time risk and profitability and number of orders in a given time frame as his main parameters in the checklist. More importantly, this checklist needs to be managed by someone responsible. According to him, such simple measures can go a long way to create a good trading environment where algorithms will not be unnecessarily blamed in case of market crashes.

Lokesh Madan of Algo Trading India LLC feels that the problem was caused due to human error. In a Business Standard story (http://business-standard.com/india/news/sebi-to-probe-flash-crashes/472305/) he states that the volatility was caused by someone who tried to change the variable settings of an algo programme.

The future of markets is algorithms and high frequency trading. Indian exchanges understand this truth and are getting ready to operate in this environment. Many software vendors and high frequency traders are eyeing emerging markets such asIndiaas they believe there is money to be made out here due to the fundamental growth in the economy.

Algorithms should not be considered as the ghost in the machine. It should not be taken as the sole factor that causes market crashes as it only reacts to situations. Many times these are just bugs in the system. These bugs can be solved by stress testing and market simulators. However, there will still be errors and market crashes. But going back on algorithmic trading will be difficult. We will have to accept this future and tread carefully.

Keeping a check on algorithmic trading is a continuous process. The regulator obviously knows who was responsible in placing the orders that caused a flash crash on the Nifty. If an example is made out of the firm which caused this problem, it will only help other players to improve and understand algorithms better.

On a lighter note, we should be happy that the Flash Crash did not happen a week earlier or the superstitious trader would have blamed Friday 13 as the reason for the crash. If the incident had happened on May 6, the May 6 Flash Crash virus that strikes every two years.

Readers can also go through this link http://newsfeedresearcher.com/data/articles_b12_2/bats-trading-exchange.html . The story talks about BATS Global markets one of the biggest electronic exchanges, which had to stop trading its shares due to technical problems or errors in the trading system. It was the first day of trading for its IPO and everything went wrong. BATS had to cancel its IPO. It was again a Friday. BATS has now solved its problem and remains true to the field of electronic or algorithmic trading with the lowest error rates on any exchange.

It came as a big surprise for the financial markets when the Indian operations of Fidelity mutual fund went on the block last month declaring that it was exiting the Indian markets. But the bigger surprise was yet to come. It came last week when L&T mutual fund with assets worth Rs 4,600 crore acquired the Rs 8,800 crore-Fidelity MF, subject to regulatory approvals. Expectations were that it would be HDFC mutual fund or any of the other bigger guys which would buy out Fidelity.

The Indian mutual fund market has been flat for the last five years and staying profitable in this industry is a big challenge. Industry experts feel that L&T has paid a huge price at Rs 550 crore or 6.25 percent of the assets under management (AUM) of Fidelity India because they have got these assets without the expertise of the fund managers. HDFC MFs biggest acquisition will always be Prashant Jain when the fund acquired Zurich mutual fund in 2003.

Typically in a mutual fund business the real assets for any active fund are their fund managers. Over the last two years the equity funds of Fidelity India were at their peak form due to the hard work put in by the likes of Sandeep Kothari and other members in his team who where managing the equity portfolio of Fidelity MF. The asset management team will remain a part of Fidelity’s international team and there is a huge chance that the Indian team will now be moved to Hong Kong as the Indian operations cease to exist. Kothari relocated to India from Hong Kong in 2006 to look after their three important schemes – Fidelity Equity, Fidelity Tax advantage and Fidelity India growth fund. L&T mutual fund will have a lot of work to do as far as handover of these funds are concerned as the fund managers will not be around for a long time.

It would have helped L&T to get in the fund managers along with the schemes. But the L&T finance is not worried. “The current portfolio managers will continue to manage these funds for such a period as the two companies agree as being necessary for smooth transition. After that they revert to Fidelity. Training programs will be available by Fidelity Research Directors to the L&T fund managers and analysts as a part of knowledge transfer for the period of transition”, says N Sivaraman, whole time director, L&T Finance holdings.

The Indian markets have witnessed eighteen acquisitions over the last ten years at an average cost of around 2 percent of the Assets under management (AUMs) of the acquired fund house. Foreign funds which have sold their assets to Indian funds have normally done it for 6 percent of their AUM along with the fund managers. HDFC mutual fund acquired the assets of Zurich MF in 2003 at 5 percent of its AUM.

In 2004 Birla Mutual Fund (MF) acquired all the schemes belonging to Alliance mutual fund with assets worth Rs 2,000 crore. Birla MF had sizeable assets at Rs 9,000 crore and the acquisition helped the fund to move up its position in the AUM race. The fund managers were not a part of the deal. Alliance Mutual fund was known for its star fund manager Samir Arora who did not join Birla Mutual fund and moved base to Singapore. But Birla MF was already managing a fund size which was four times the size of Alliance and earlier had a fair share of star fund managers like Bharat Shah.

L&T mutual fund is generally distributed through independent financial advisors (IFAs) and is not strong as far as banking channels are concerned. On the other hand, Fidelity MF has relied exclusively on the foreign banks. L&T mutual fund feels that this allows for a strategic fit because it will now get access to the foreign and private sector banks that will help L&T MF grow its assets.

This on the face of it is a great idea but the mutual fund industry is sceptical. A CEO of a private mutual fund told Forbes India that the chance of foreign banks churning out the assets of Fidelity MF cannot be ruled out. “These banks have got in the funds for Fidelity and they can easily move the money out. L&T mutual fund will have to work really hard to retain these equity assets�.

SEBI has heavily come down on banks as they were known to churn funds to get more commission out of investors. But in case of a merger SEBI may not interfere if banks advise their clients to move out of L&T into some other funds. Again, there are no exit loads in case of mergers and many mutual fund advisors and even newspapers are advising Fidelity investors to stop their SIPs or not to invest into Fidelity funds and wait and watch the L&T fund managers perform.

The mutual fund industry feels that at Rs 550 crore or 6.25 percent of AUM, L&T mutual fund could actually have tied up with intermediaries and raised more equity assets than the Rs 6,300 crore equity assets that they will receive from Fidelity India. This is because L&T already is working with IFAs and national distributors which is brining in the assets to the mutual fund industry. According to a report by Mckinsey, IFAs accounted for bringing in 39 percent of the assets and national distributors like Bajaj Capital collected 26 percent of the overall retail assets in 2011. Banking channels are important but they have stopped growing due to regulatory hurdles.

L&T mutual funds have got the assets of one of the better equity funds in the country. Now it is for them to manage these assets to go on the next level. This may not be an easy task but the mutual fund feels confident that it will cross this hurdle.

It was only three months ago that I saw Soulmate, a blues band from Shillong perform live at the NH7 weekend. It was one of the most rocking performances that I had seen in years from an Indian band. Tipriti Kharbangar had a Joplin kind of a presence and took the crowd by storm.

Tipriti - Soulmate

I was desperate to see Soulmate perform one more time. I had no idea that the opportunity would come at a wine festival.
I’m really not into wine. The idea of going for a wine-tasting event had always seemed very yuppie. So the Sula wine festival was really not my scene. But everything changed when I saw the line-up of the bands that were gong to perform for next two days. There was Soulmate, Nitin Sawhney, Papon and Nikhil D’souza.
The last two have made themselves a name because of their Bollywood singles. Nitin Sawhney was going to perform for the first time in India and that was reason enough for me to attend.
At the vineyard, I almost expected men dressed in formal ties, women with hats and long dresses and heaviness in the air that makes me uncomfortable. (I had been to a wine tasting event last year in Bandra and I was bored to death)
But things turned out differently. It was more like a music festival than a wine event. The liquor was not restricted to wine and there was plenty of whiskey, rum and beer for those who just did not have it in them to go for that second bottle of wine. Rayban aviators, khaki shorts and slippers were everywhere.
The afternoon kicked off with a small gig by Nikhil D’souza with the blackstrat blues. They concentrated on alternative rock with guitars and drum solos. The band failed to involve the crowd and played for themselves and went away.

Nikhil D'souza with the Blackstrat Blues

We decided to hang outside the admin office tasting wine. Everyone was having a rocking time and we were getting ready for Papon. Instead of beer or rum, we decided to stick to wine for the simple reason that it was economical.
It was around 9 pm we heard the first tune up of Papon and the East India Company. We had to drop our dinner plates and rush into the amphitheatre, that was already filled with people. There was no place to stand and we found ourselves far from the stage.
Papon loves to talk about Shillong. He loves to involve the crowd and considering that most of his songs are electronic folk in Asamese– he just does a great job.
Raghu Dixit is known to do this to the crowd. Singing in Kannada, he holds the crowd with his voice and music to apt attention. Papon is similar but probably more contemporary. He is one of the few musicians who can destroy the language barrier.
The performance gathered a high response when he went into Jiyen Kyun, the Bollywood song from Dum Maro Dum, that has been one of the big hits of 2011.
The crowd went ballistic especially after he announced that he was a great admirer of Nusrat Fateh Ali Khan and would attempt a song that often separates real Sufi music from the shaggy haired wannabes.
When he hit the first note of Dama-Dam Mast Qalandar, the crowd closed on to the stage. The song started on a slow rhythm and ended into a rocking Rage Against the Machine (RATM) style kind of finish. At that point in time it seemed like one of the most mind blowing live acts, I had seen in a long time. Much later, back in office, my colleagues Shishir and Vikas felt little emotional connect when they saw the video. They still prefer the classic Sufi versions. I will not argue about that. But at 10 pm in that chilly vineyard in Nasik, in the amphitheatre, Papon just felt right. Maybe it was the wine and the overall energy of the crowd, the song simply took us higher. I shot a video of that song. It is jerky at times. But you can take a look at it here
We came to our hotel rooms and could not stop talking about Papon and the East India Company.
The next day began with Ankur and the Ghalat family. Hindi rock. Great performance and Ankur had the ability to get into the crowd and get them on his side. We look forward to more from this guy.
Soulmate did their own stuff. Power blues. It was out of this world. I was happy to see Tipriti letting her hair down for an awesome performance. It was 3.30 pm and the weather was pleasant. But the connect with the crowd was missing. The band needs to talk to the crowd. Maybe even play one or two cover versions. It helps. The crowd loves it. And it is a different high for the band.
The evening belonged to Nitin Sawhney. It was his first Indian concert. This is modern music. Swahney has managed to put up a band of international musicians. The lead singers Nikki Wells and Sloka glowed in the evening sunset as they blended Indian vocals and Husky jazz. Incidentally, Wells, the tall blonde singer brings freshness to Indian classical singing. The singers had made a distinct connect with the crowd.  This was music at its best. No language involved.
As we made our way back home at around 8.30 pm, we did not say much through the journey. In our minds we had Papon and Sawhney for company.

Anybody who has seen Dexter, the popular American television series, will agree to a simple fact that whatever the bloodstain pattern analyst does, it is for the betterment of the entire society. He is a killer who kills serial killers. Utilitarians are people who do not hesitate to sacrifice an individual for the betterment of a group. Dexter Morgan is a classic case. He works with the police force and goes after serial killers who have escaped the law. Most people who watch the TV serial are confused about Dexter’s method of delivering justice. After all, he goes in for the kill. Is killing a good thing so that the entire society can live in peace?

The answers are not easy. Michael Sandel, an American political philosopher and a professor at Harvard University who is very popular for his course on Justice loves to make his class uncomfortable by asking questions where the students have to make a moral choice. He takes you in and out of Dexter like situations and by the time students are done with his lectures they are in a very uncomfortable position. They are probably better off watching Dexter than deal with these questions themselves. Sandel’s lectures take the students through a series of cases where the high point deals with cannibalism. http://www.justiceharvard.org/

Two researchers, Bartels (ColumbiaUniversity) and Pizarro (CornellUniversity) who have recently published a paper to understand utilitarians have answered the questions that have troubled the viewers of Dexter as well as the students of Sandel. You can get their entire paper here: http://leeds-faculty.colorado.edu/mcgrawp/PDF/BartelsPizarro.2011.pdf

The Economist carried an article about their research in its September 24^th issue: It had the classic runaway carriage example:

One of the classic techniques used to measure a person’s willingness to behave in a utilitarian way is known as trolleyology. The subject of the study is challenged with thought experiments involving a runaway railway trolley or train carriage. All involve choices, each of which leads to people’s deaths. For example: there are five railway workmen in the path of a runaway carriage. The men will surely be killed unless the subject of the experiment, a bystander in the story, does something. The subject is told he is on a bridge over the tracks. Next to him is a big, heavy stranger. The subject is informed that his own body would be too light to stop the train, but that if he pushes the stranger onto the tracks, the stranger’s large body will stop the train and save the five lives. That, unfortunately, would kill the stranger.

These researchers have concluded that utilitarians are psychotic and love violence. They feel that life is meaningless and do not have much interest in the finer things in life.

Generally only 10% of the people agree with the utilitarian approach. That is 90% of the people do not want to kill the fat man. The article further argues that  utilitarians might end up adding to the sum of human happiness even if they have a miserable view of life.

If not anything, these two researchers have proved Dexter right. Even if he has a different and violent view about life he simply adds to the happiness quotient of Miami. Had Dexter taken the above quiz, there was a complete chance that he may not kill the fat man for the simple reason that he is not a serial killer. On the other hand, if this event was happening in Miami, Dexter would just hope and pray that at least one of the workers on the runaway is a serial killer.

Lets take this to the financial markets. Utililitarian’s are psychopathic. Recent studies, especially after the meltdown in financial markets have argued that markets are irrational because investors are irrational. Behavioral finance is an upcoming field that is expected to answer questions about the animal spirits of investors and irrationality in financial markets. As of now the field has not been able to come out with a model. All it argues is that the existing models of market efficiency are flawed. Eventually, behavioral finance will come out with a model that will be totally based on the utilitarian theory of choice. Fund managers may just not make it to the mark. After all, utilitarians might be dark and depressed personalities but they would have at the end of the day thought about the betterment of the society or in this case returns to the investors. In most cases, fund managers make money for themselves.

And now this is for those who have recalled the title sequence of Dexter after an overdose of utilitarian philosophy.

Over the last six months the rupee is down by 18%. Indian corporates who had raised loans from the overseas markets and did not bother to cover their currency exposure were a worried lot. The losses on the currency exposure were going to hurt their profits. But a recent guideline from the ministry of corporate affairs will allow them to now amortise these losses for the next ten years and this will put a lot of Indian companies back into the black.

According to a Crisil report, the depreciation of the rupee will wipe off 8% or Rs 48 billion of the profits for Nifty companies for July-September quarter. The foreign debt of these companies works out to around 24% of the total outstanding debt which is considered reasonably high as any further depreciation of the currency will harm profits. Now with companies allowed to amortise their losses over a longer period, these companies can take relief as the bottom lines or profits will not be hurt severely.

The rupee had witnessed a similar fall in 2009 when it had touched Rs 48 against the dollar and Clause 46 (of accounting Standard 11) allowed companies to amortise losses to the extent of two years. So a loss of $10 million was written off over two years. Now with the new change, Indian companies will be allowed to capitalize the losses in the assets purchased out of long term foreign currency loans and depreciate these losses over the life of the assets. In case of other long term the loans, the foreign exchange losses will be amortised over the tenure of the loan.

Not many companies had exercised this option of writing off their losses in 2009. According to a Crisil study, 42 non-finance companies Nifty companies, only nine companies exercised the option.

According to IFRS, companies do not amortise their losses and they have to take a hit on their P&L account on the same year. However, this will not have any implications on the cash flows, as these are marked to market losses.

What matters is how well companies disclose details pertaining to these losses in their financial statements. Informed and institutional investors will need to know how companies are showing these losses parked in the balance sheet in their financial statements to make their own calculations and adjustments�, says Prasad Koparkar, Head – Industry and Customised research, Crisil.

The fall in rupee is expected to hurt sectors such as oil & gas downstream, telecom and steel as they have high debt:equty ratios where the debt is in foreign currencies. On the other hand sectors like IT and Pharma are benefiting from this fall as their export revenue is more than 50% of their total turnover.