War of the Currency Exchanges (MoneyLIFE Issue, 18th Dec 08 - Current Account)  

December 2, 2008

 Competition between India’s national bourses has always been intense and bitter. For over a decade, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have been at war. During this period, the NSE has become a monopoly in the equity derivatives segment and it far outstrips a bumbling BSE in the cash segment. The action has now shifted to currency derivatives where there are three players: the NSE, the BSE and the MCX Stock Exchange (MCX-SX).
The NSE managed a head-start of a month in the business only to be occasionally outstripped in terms of turnover by MCX-SX within weeks after it was allowed an entry. This battle may not be one-sided like the NSE-BSE one. MCX-SX is promoted by the already successful MCX, a leader in the commodity derivatives business. In turn, Financial Technologies (FT), a dominant technology provider in the capital market business, has promoted MCX. It is also a fierce competitor run by a committed and clearheaded management team. No wonder, things have already turned ugly.
NSE has put FT’s empanelment as a CTCL (computer-to-computer-linkages) vendor for equity and derivatives markets on a watch-list, even though it has been catering to markets since 1998. NSE apparently did this without any warning or explanation. This has forced FT to up the ante and send NSE a legal notice. Clearly, the war is set to escalate in the near future.
Why have things come to such a pass?
Well, FT commands an 80% market share in CTCL solutions through a broker front-office product called ODIN. Its popularity cuts across bourses including the NSE, BSE, MCX and NCDEX. It has emerged as the leading vendor, beating powerful competitors such as TCS, IBM, Wipro, Leading Edge and even NSE’s own subsidiary NSE.IT. But neither FT nor MCX competed with the NSE at that time and the relationship was extremely cordial. In fact, NSE even acquired a 5% stake in MCX although it already held equity in the National Commodity Derivatives Exchange (NCDEX).
 Over the years, FT began to establish itself as the first private sector promoter of stock/commodity exchanges. MCX is a market leader in commodities derivatives, successfully beating the NSE-promoted NCDEX (where NSE now plays a dominant role in management). MCX-SX is repeatedly challenging NSE’s lead in currency derivatives and, in fact, has a far smoother trading distribution. More importantly, it has earned international standing after the success of the Dubai bourse and its entry into Singapore and Africa. Clearly, as a competitor, the FT-MCX combine is vastly different from the somnolent BSE, since it is strong on technology as well as implementation.
 To observers, the first hint of bitterness was evident when NSE did not even bother to invite MCX to the inauguration of its currency derivatives exchange. This is a courtesy that people in the industry have seldom failed to extend. The Economic Times reported, on 11th September, that NSE refused to share what is known as the authorised protocol interface (or API) with FT-MCX. Meanwhile, NSE launched its own trading application, NOW, which its members can use across markets including the NCDEX and NSE. Market sources say that its refusal to share API was probably aimed at giving NOW a chance to find acceptance. Media reports suggested that NSE is worried about sharing API which would give the rival MCX access to information about its major traders.
On checking, Dewang Neralla, director
technology at FT said, “FT has provided solutions for all competing brokers/financial institutions and exchanges including NCDEX and BSE and none of them ever had a problem with our neutrality in 10 years of our business. More so, our product runs like a Microsoft Windows licence at each broker site.”
Soon enough, brokers seeking approval on NSE were told that FT’s empanelment as technology provider was on a watch-list. This shook up brokers who wanted to use the FT product or were already using it in their equity or commodity businesses. When asked, FT sources said they heard about this through market rumours and, on checking, the NSE assured that the rumours were baseless. Mr Neralla also confirmed to us that a broker, who received NSE’s approval for Internet trading, had first told FT about NSE’s letter stating that they had been put on a “watch-list for systemic and performance issues.”
 He said that he immediately wrote to the NSE managing director asking for details about why it had been put on a watch-list. At that time, FT had also written to NSE’s currency exchange seeking the sharing of APIs for currency derivatives. Mr Neralla says that over 100,000 terminals use its technology and any systemic problem would have been highlighted long ago, in a highly competitive market where trading volumes were soaring every day, until the recent global financial crisis.
Although Mr Neralla was reluctant to share details, we have documents to show that an NSE vice-president has written to the company mentioning ‘issues’ faced by trading members and ‘concerns’ about FT’s product. The letter refers to two previous communications in June 2007 and March 2008 without details and breezily says, “As you may be aware, your empanelment status has been kept under ‘watch List’ by the Exchange in the larger interest of market participants.” When asked, Mr Neralla says that these letters were responded to in detail and no further questions were raised by the bourse.
When MCX was not in direct competition with the NSE, this would have been an internal matter. Even then, a dominant vendor would expect to be given fair warning under the principles of natural justice, before being put on a ‘watch-list’. The absence of due procedure suggests that the issue is more about competition between the bourses rather than technology.
Neralla says, “For us, it is not a question of competition. Our brand image and our very survival is at stake. We have no choice but to put up whatever is legally permissible to ensure that our hard work over the past decades is not destroyed by unfair competition tactics.” FT, we learn, has asked NSE to reveal the criteria for putting vendors on a watch-list and what is meant by putting an “empanelment status under the watch list?” It has asked which other vendors have been put on such a watch-list and asked NSE why the alleged ‘repeated complaints’ were never referred to it.
 The issue exposes the need for regulatory intervention to put in place some ground rules to ensure that unfair competitive strategies are not allowed to ruin a business and end up in legal tangles. So far, because the BSE was seen as a broker’s club, many of its complaints about the NSE’s monopolistic ambitions were ignored. As was the BSE’s allegation that NSE enjoys institutional status and is not treated on par with itself; whereas the reality is that NSE is as private as any de-mutualised bourse like the BSE or MCX-SX.
The Securities and Exchange Board of India (SEBI) is aware of competition issues that have cropped up between the bourses and insiders say that officials of both bourses have been spoken to on certain issues. It is time that SEBI, the Forward Markets Commission and the Reserve Bank of India (RBI) put their heads together to decide how some basic issues relating to technology, information-sharing and competition will be handled. After all, stock exchanges are self-regulatory organisations and are the first level of regulation themselves and these issues will keep cropping up as the exchanges grow, expand overseas or invest in other businesses.
We had sent a list of queries to the NSE managing director, Ravi Narain, to seek his views on the issue of unfair competition but received no response from the bourse. We had also written to the SEBI chairman, but have received no response to our queries.

-Sucheta Dalal