Competitive one-upmanship is not uncommon in business. The telecom wars being currently fought out are a good example. But, when this happens in a duopoly like the stock exchange business, it makes one wonder why. The recent competitive rush to increase trade timings played out between the BSE and the NSE is an exposition of how management processes work and the impact they have on stakeholders’ interests.
The genesis of this problem lies in the changed structuring of the stock exchanges and the diminishing hold of stakeholders over them. Stock exchanges were traditionally collectively managed by brokers. That was before the launch of the NSE. The NSE was established as a third-party service provider. It was not owned by brokers. As a self-regulatory organisation, the exchange has unrestricted ‘leverage’ over its members. The members have to ultimately bear in mind that it is the exchange which they will have to deal with on a day-to-day basis. The exchange knows this only too well and has always kept its members almost like a subjugated and subservient community. ‘Remember, we audit you’ is the unstated message from the NSE to its members.
The decision-making process of the NSE has therefore been centred on its ability to keep SEBI on the right side of what it does. The brokers’ views have not bothered the management of the stock exchange as long as they could take the regulator along. This mindset has dominated all that the NSE has done in its history and its latest decision is no different. The BSE has copied the NSE and corporatized itself over the years. Today, its professionals guide a paranoid board and a sense of extreme desperation pervades all they do. The BSE's attempt to play catch up with the NSE in the F&O business has triggered this rash decision spree.
More trading hours should normally mean more business. Higher brokerage incomes should therefore be the most expected outcome from this move. More business means bigger earnings for the stock exchanges. Maybe the stock exchanges will go public shortly. Needless to say, the professional executives will be given lucrative ‘options’ to benefit from the listing. ESOPs will emerge as the key driver of executive compensation. The decision-making process for the extension of timings seems driven by this imaginary growth paradigm. The stock exchange whose revenue model works like a ‘toll’ has everything to gain and little to lose from longer hours. It is a no-brainer that this move benefits them in good times with very limited downside in bad times.
Let us see how this move will impact other stakeholders like the dealers who work long hours and the back-offices which are already stretched. This extension won’t stop here. There is more bad news waiting for them.
From the brokers’ viewpoint, these are good times for the markets. But, one should not assume that good times will last forever. What needs to be factored in is that there will be bear markets when costs will remain fixed and incomes will fall.
The outcome will ultimately result in higher costs to brokers, greater pressure on smaller entities, closure of the smaller brokerages, consolidation of the broking industry and greater share of the overall business for larger brokerages.
Cost increases will ultimately need to be passed on. It is quite evident that brokerage fees will rise. Transactions costs for the retail investor will increase.
But all this hardly matters to the stock exchange. For, the truth of the matter is that the exchange is principally acting in its own interests. The interests of its powerless stakeholders can always be taken care of by time and their lack of collective will.
One last confession from me in conclusion: While I was writing this piece, I forgot to think about how the investor benefits. But I'm not the only one to do so. I have the NSE and the BSE for company.