Hedge funds, the biggest investors in the domestic stock markets in recent times, dumped stocks for the second straight day on Friday, booking profits after a profitable run in the last three months.

Further pressure on the markets came from institutions committed to program trading whose systems sent out sell orders when the Sensex touched 3,750 in intra-day trades on Thursday.

Brokers added that retail investors sold shares in the markets, prompted by heavy margin calls on their exposure in the derivatives markets.

With the market-wide limits in a number of stocks hitting the 80 per cent trigger, the National Stock Exchange doubled margins on stock futures.

Adds a dealer at a local brokerage house, "Several traders offloaded their positions in the cash market to meet the margin calls in the derivatives segments."

The market has rallied 20.5 per cent in the past seven weeks, as foreign funds stepped up purchases, betting on a monsoon-led recovery.

Market sources said many overseas investors were firm believers in program trading, leaving all buy and sell decisions to their IT systems after the fund manager sets the internal limits.

These sources said, "The 3,750 level is a crucial technical resistance level in the Indian markets, and it stands to reason that program traders programmed sell signals at this level."

Rohit Shrivastav, market strategist at institutional brokerage SSKI said: "This is the third time in the last three years that the market has hit the 3750 barrier and retraced its steps. The Sensex has, in fact, made a triple top formation which is also significant."

On May 30, 2001, the Sensex touched 3759.96 and fell from that level. On  February 27, 2002 it touched 3758.11 and finally on Thursday when it touched 3750 in intra-day trades, to fall back again.

Interestingly, the open interest on NSE's F&O segment has surged from 20.26 crore shares on Wednesday to 21.63 crore shares on Friday, which incidentally is an all-time high on the NSE's futures and options segment.

Hedge funds, which operate in the country through the participatory notes route, had pumped in over $1 billion (Rs 4,700 crore-plus, at earlier exchange levels) in the Indian markets in 2003.

Market sources said US-based hedge funds were the major sellers, though no independent confirmation was available.

Around 40-50 per cent of the overseas money flowing into the Indian market is through the participatory notes route and most of it comes from hedge funds.

The Sensex closed on Friday 21.33 points lower at 3,647.58. This is the first time in the last seven weeks that the markets have closed lower week on week.

In fact the market has lost almost 75 points in the last two trading days, on a closing basis. But it is a good 100 points off Thursday's intra-day peak of 3,750.

"We may see a further downside from here and 3600 looks to be a support level but if that too is broken, then we can go back to the 3320 levels," Shrivastav added.