I read in todays newspaper that yesterday's index rally was based on short covering. As far as i know you cannot carry shorts in the cash market overnight. Then how is it possible?

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90% of the trading volumes on exchanges are because of futures and options. So in our markets, they basically drive where the market moves short term.

So when you read the article above short covering, it meant all those people who are short on the market in F&O squaring off their positions because of the market moving higher in the last few days. This gives added momentum to the rally.

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Nithin, FnO is just an instrument that derives its price from EQ, I am still wondering how FnO drives the market and not its underlying(EQ)?