The Indian IPO market has been witnessing a curious trend where newly listed stocks continue their upward trajectory for several days after debut. While demand-supply dynamics are often cited, Zerodha founder Nithin Kamath has highlighted a crucial technical factor behind this sustained rally: short deliveries and subsequent exchange auctions.
The Trap of Intraday Short Selling
In a detailed post on social media platform X, Kamath pointed out that beyond the obvious drivers like limited free float, a specific trading behavior contributes to the momentum. Many traders attempt to short these high-flying IPO stocks intraday, anticipating a price fall. However, they often find themselves trapped when the stock hits the upper circuit limit. With no buyers available at that ceiling price, these failed short trades result in what is known as a short delivery.
How Exchange Auctions Inflate Prices
Kamath elaborated on the critical next step. When short deliveries occur, the exchange intervenes to settle these trades. This happens through a special auction window between 2:30 PM and 3:00 PM on the following trading day (T+1). The demand to cover these short positions in the auction often leads to clearing prices at a significant premium compared to the prevailing market rate.
He provided a concrete example from the recent Meesho IPO. The auction price for Meesho shares reached ₹258, while the market price at that time was hovering around ₹226. This substantial gap illustrates the powerful price discovery mechanism of the auction process, which directly feeds into the stock's upward momentum.
A Lucrative Opportunity for Retail Investors
Kamath emphasized that this mechanism isn't just a technical detail; it creates a tangible opportunity for retail investors. Investors who hold the IPO shares in their demat accounts can participate directly in this auction. They can offer their shares for sale during the window, potentially exiting at a higher price than the open market offers, while simultaneously aiding the exchange in settling the trades.
Zerodha has already integrated this feature into its trading platform, allowing users to seamlessly participate in these auctions from their holdings. Kamath cautioned investors that being unaware of this process means missing out on potential profits. "Missing this opportunity means handing profits to someone else," he stated, urging market participants to understand how auctions function within the IPO settlement cycle.
This insight from one of India's leading fintech founders sheds light on the often-overlooked technical engines that drive market movements, providing retail investors with knowledge to navigate post-IPO volatility more effectively.
