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    Bait-and-switch: Bears go after Wendt shares, get ambushed

    Bait-and-switch: Bears go after Wendt shares, get ambushed

    Bait-and-switch: Bears go after Wendt shares, get ambushed
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    By CNBCTV18.com  IST (Updated)

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    Bears recently went after an illiquid stock after the company came up with a deep-discount offer-for-sale. But the move didn't end so well for them.

    Earlier this week, around 10,000 shares of machine tools maker Wendt were auctioned on the NSE at an average price of Rs 4,100, brokers tracking the stock said.
    This was more than 25 percent higher than the closing price of the previous session. Also, the quantum of shares auctioned was quite high for a stock in which barely 500 shares are traded on most days.
    Shares are auctioned when a seller is unable to deliver the shares which he/she has sold, to the clearinghouse. The seller then has to buy the shares in the auction, and deliver it to the clearinghouse.
    So why did so many short sellers go after an illiquid stock, well aware that it would be difficult to cover positions if prices moved against them?
    The answer most likely lies in the company’s offer for sale (OFS) issue last week, the floor price of Rs 2,200 at a near-30 percent discount to the prevailing market price.
    The low floor price surprised market participants considering that Wendt shares had been consistently trading between Rs 2,600-3,000 for the last six months.
    Some months back, when GMM Pfaudler had announced the OFS floor price at a similar discount to market price, the stock price immediately collapsed.
    Expecting a similar reaction, many sold Wendt shares in the secondary market, expecting to either buy back a similar quantity at a lower price through the OFS, or just square up their short positions when the market price adjusted to the OFS price. Most traders were expecting that the issue would be subscribed close to the floor price.
    The OFS was open for subscription on January 7 and January 8.
    Wendt shares fell 5 percent to on January 7, to Rs 2,945 but rose the following day. Brokers tracking the OFS window said there were huge bids at Rs 2,200 early, but minutes before the deadline, the bids were revised higher to Rs 2,900.
    With the final OFS issue price close to the market price, short-sellers and those who had sold their existing shares in the hope of buying it cheaper in the OFS, were left stranded. Short sellers scrambled to cover their positions, and the stock rallied 11 percent to Rs 3,287 on January 8.
    The rally continued on Monday as well, with the stock climbing 21 percent intra-day and nearly topping Rs 4000.
    For a stock in which barely 500 shares changed hands on most days, the average daily volume between January 7 to January 11 was close to 50,000 shares.
    Wendt shares are settling back in to narrow range after the wild swings of the past week. But for short-sellers who lost a packet hoping to make some quick gains, it could be a while before they get over the episode.
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