Sucheta Dalal :Stock Exchanges: BSE’s gambit
Sucheta Dalal

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Stock Exchanges: BSE’s gambit  

August 21, 2012

The BSE estimates the collective savings of brokers will be over Rs1,000 crore per year due to lower charges. But what happens if the NSE decides to match the price?

Sucheta Dalal

Even as it has announced plans to go public, the Bombay Stock Exchange (BSE) is taking on current and future competition, with incentives as well as dramatically lower transaction charges. In fact, BSE’s transaction charges are 87% lower in the futures segment and an astounding 99.5% lower in the options segment. This may be the real game-changer and not the Rs100.6 crore (of this, Rs40.1 crore has been in FY12-13) that it has spent on incentives to brokers under the Liquidity Enhancement Incentive Program (LEIP) permitted by the market regulator since June 2011. BSE’s strategy is interesting. It is clearly willing to forego revenues on the derivatives segment to gain volumes. This has a dual advantage.

On the one hand, it takes away business from the National Stock Exchange (NSE) by daring it to lower transaction costs. Ashish Chauhan, who used to be a part of the original team of the NSE, clearly knows that its high valuation and the hefty pay-packets and perks of senior management are entirely based on extremely high profitability. If NSE lowers transaction charges to challenge competition, profits will take a hit.  If it does not, the huge difference in charges is bound to wean business away to the rival bourse, especially when liquidity is supported through trading incentives. There is another angle too. Having cut transaction charges to this extent, the BSE has raised the entry barrier tremendously for MCX-SX. Moreover, since the BSE is charging transaction fees, it cannot be dragged to the Competition Commission either.

According to figures provided by the BSE in response to our query, the incentivised trading volume in August is just 10% (Rs3,420 crore) of the daily average trading volume of the month which was Rs32,956 crore. Also, it says, 356 Indian and nine foreign brokers have registered to trade in the derivatives segment. The BSE says that the transaction charge comparison is as follows: Rs50/crore for futures and Rs50/crore on options premium (round trip) on the BSE, compared to Rs380/crore (round trip) of the NSE in futures and Rs10,000/crore (round trip) on options premium of the NSE. The BSE estimates the collective savings of brokers will be over Rs1,000 crore per year due to lower charges. According to the BSE, new products, such as the BSE 100 index futures & options and cash futures spread product, as well as efforts at beefing up technology for trading, clearing and settlement of derivatives with risk and collateral management will allow it to grow volumes and ensure liquidity. For the BSE, it is a delicate game—sacrificing income for volumes really takes the battle to its rivals’ door in the short run. But what happens if the NSE decides to match the price? For NSE, it’s a tough call. In the currency derivatives, NSE’s zero transaction charge was subsidised by high charges in the equity derivatives segment, until stopped by the Competition Commission. But if it chooses to match the BSE, its bottomline will be directly impacted. Interestingly, the cash-futures spread product of BSE is similar to one that the MCX group has in the National Spot Exchange for commodities.

-- Sucheta Dalal