The market consists of investors and traders. Most of the liquidity is provided by the traders.

So traders must have gone long in YES BANK because there was a rumor about LIC and SBI taking a stake – aka bail out.

This means good things for the bank. However the share got valued at Rs. 1 per share – a token payment. Clearly the assets available is not sufficient to pay off the deposit holders. I know a few people – one who had Rs. 10 crores – and one who had Rs. 20L in Yes Bank. These are real big amounts. It actually surprised me – but what happens is people think they are getting good service…so why not.

Great. Now why should Nippon Asset Management, Biocon, Max Financal services, Cholamandalam finance, Indigo, Sun Pharma – I just picked some pharma and BFSI stocks – fall?

Well those people who were long in say Yes bank (which had tanked 25%) or had an open position (or call options) and lost money will have to make a margin payment or pay for losses. In case they did not have money, the broker would sell the shares kept as security. The broker will sell whatever he can, not what the client says. Also if there is no depth in the market to say absorb 100,000 Cholamandalam, he will sell 10,000 Chola and for the balance he will sell say Biocon.

So on a day like this when YES BANK is tanking (going by the valuation of SBI, this share should go to Rs. 5000 crore market cap. Even this is likely to be questioned. Remember even now YESBANK has a market cap of Rs. 9500.

Will it really go to Rs. 5000 crore market cap? That is not known, but there would be some long term investor willing to buy at say 9400 crore market cap and hold for the “revival story”. There could be a lot of retail investors who may have entered at Rs. 300 and willing to average at 35. So in all this greed and fear this company will find a price..and settle there.

For many brokers and mutual funds (amc) YES BANK was the collecting bank. For some of the amc it was also the bank account from which the disbursement would be made. All these things have to change. Suppose some money (say Rs. 2000 crores) was collected yesterday…and it was lying (is lying) in the collection account…what NAV will the client get?

My broker had about Rs. 24 crores of FDR lying as security. All those clients have to replace the FD or risk that their shares in the open position will be sold off. Suppose this has TCS, Oracle, Hdfc, and Supreme industries. These also would get sold off if the client can’t replace those FD with other security!

Sure it will take many years to recover….RBI will put in a new team…

Caveat: I may have (or not have) a short (or long) position in the shares mentioned here. Even worse, I may be plugging my book…which has nothing to do with demand and supply of shares. Caveat Emptor.