Prop Traders Exploit Futures Discount in Indian IT Stocks via Reverse Arbitrage
Proprietary traders are leveraging the National Stock Exchange’s lending mechanism to capture risk-free spreads on major Indian technology stocks, highlighting sustained bearish sentiment in a sector overshadowed by the global artificial intelligence rally.
Proprietary traders are aggressively borrowing shares of India’s largest technology companies to execute reverse arbitrage strategies. This activity capitalizes on a pricing anomaly where underlying equity shares trade at a premium to their corresponding futures contracts.
By utilizing the National Stock Exchange’s stock lending and borrowing mechanism, traders sell the borrowed shares in the cash market while simultaneously buying the discounted futures. This locks in high single- to double-digit annualized gross returns with virtually zero market exposure as the prices converge at expiry.
The structural discount in IT futures stems from prolonged sector underperformance against the benchmark Nifty over the 15 months leading up to June. Capital has steadily rotated out of domestic technology firms toward overseas artificial intelligence beneficiaries such as Nvidia, TSMC, Samsung and Microsoft.
Market data illustrates the scale of this shift. In June, Wipro was the most borrowed security on the exchange with 122.43 million shares outstanding, followed by Infosys at 29.15 million shares. HCL Technologies and Tata Consultancy Services also ranked in the top eleven.
Collectively, these four technology giants accounted for more than half of the 329.97 million total shares borrowed through the mechanism last month. Retail high-net-worth individuals and foreign portfolio investors are the primary lenders, earning fees of 3 to 5 percent of the share value.
Ashish Nanda, chief business digital officer at Kotak Securities, confirmed the dynamic. “Arbitrageurs have been making use of the bearish market sentiment in heavyweight IT counters by selling the underlying stocks borrowed from the SLBM segment and simultaneously buying the futures of such stocks, which are trading at a discount to the underlier,” he said.
Nanda added that net returns remain in the mid-single digits or higher. This accounts for lending fees, exchange charges, securities transaction tax and the cost of capital.
The mechanics of the trade offer a clear illustration of the locked-in profit. When Wipro’s underlying shares traded at 174.24 rupees against August futures at 169.83 rupees, the spread implied a 20 percent annualized return.
If the stock settles at 190 rupees by late August, the trader absorbs a 15.76-rupee loss on the cash sale but realizes a 20.17-rupee gain on the futures contract. The resulting 4.41-rupee net profit per share is secured regardless of the final settlement price.
These risk-adjusted yields significantly outpace the broader market, especially given the Nifty’s negative 5 percent return in fiscal year 2026. V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, expects the dynamic to continue. He noted the trend will likely "persist in most of the big IT counters due to the global AI trade over the next few quarters."
