Sucheta Dalal :Creating meaningful competition for NSE
Sucheta Dalal

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Creating meaningful competition for NSE  

Oct 18, 2004


BSE executives put together a broker-friendly environment

On Friday, a stockbroker, who has been a member of the National Stock Exchange (NSE) for over five years, kicked off his brand new membership of the Bombay Stock Exchange (BSE). In the last few years he has become used to the cold, clinical efficiency of the NSE and was resigned to being treated, even by BSE, in what he describes as, “a necessary evil, to be handled with suspicion and curtness.”

At the end of his first day with BSE, he was ecstatically calling friends and clients to rave about his amazing experience with the grand old lady of the Indian capital market. His experience definitely suggests that BSE, now the official No 2 exchange, may be losing out to the NSE in terms of trading volumes, but is certainly trying very hard to woo back its members.

According to this broker, the difference was apparent soon after their application was accepted. For starters, the bourse assigned them a single-point relationship manager to handle everything—from membership formalities to infrastructure and technology, right until they actually began operations. Key directors of the firm have been issued ‘gold passes’ to the BSE’s Jeejeebhoy Towers so that they don’t have to stand in queues or sign multiple registers in order to enter the building. Several senior BSE executives called the firm to check that everything was in place for a smooth start. The broker also insists that the BSE’s ‘administrative terminal’ gives him far better control over the operations of its branch and franchisee network by allowing him to set scrip-wise or volume-wise trading limits for the stocks or block transactions from branch offices or franchisees, once upper limits are reached.

Clearly, various executives at the BSE have got together to put in place an astonishingly broker-friendly environment. Will this help in putting the BSE back in the race and reclaim the volumes that it lost to the NSE? Yes, and No.

The NSE, despite its cut and dried approach, is racing ahead and is now benchmarked against the world’s biggest bourses. It has the third highest trading turnover in the world and is sixth largest in terms of derivatives trading. To break this solid lead or even to get back into the race, BSE will need to do a lot of hard work. Winning brokers’ support by creating a friendly environment is only the beginning.

BSE has virtually shut down its derivatives business instead of making innovative attempts to offer new and unique products for trading. And despite some half-hearted attempts, it has done nothing to develop its debt market trading.

To its credit, BSE’s investor services have also seen enormous improvement in recent times and the recent ordinance enabling demutualisation or corporatisation of the BSE would put it on the same footing as the rival NSE and allow more professionalism.

However, it needs two vital ingredients to become a serious competitor for market leadership. The first is dynamic, if not visionary leadership. And secondly, a powerful surveillance department that provides the correct counterfoil to a broker-friendly environment.

In fact, investors would argue that it is the BSE’s excessive broker-friendliness that dethroned it as India’s leading bourse. And it is NSE’s brusqueness combined with efficiency and ruthless discipline that ensures market safety.

The BSE also has to explore other ways of attracting new business. One such proposal has been the Indonext platform to encourage trading in small and mid-cap companies with a capital of Rs 20 crore or less. However, even the BSE does not expect volumes in this segment to grow beyond a few hundred crore rupees a day.

Rejuvenating the derivativ-es segment seems imperative for the BSE. For a long time, its benchmark 30-scrip BSE sensitive index seemed perfect for launching a variety of Sensex-based derivatives products; but the BSE has not only failed to exploit the huge popularity of the Sensex, but its recently changed formula (based on free-float) is allegedly sending wrong signals. Nifty is the highest traded derivative product. By diverging markedly from Nifty everyday, the Sensex has even less of a chance to recover lost ground as the basis for index futures. The BSE must attempt to launch other index futures for the equity segment and develop a high-yield bond market.

Meanwhile, Sebi’s directive on a Model Tripartite Agreement between the stock brokers and their sub-broker should create another opportunity for the BSE to grow its business. The Model agreement, effective from December 1, will require brokerage entities to deal directly with all clients including those of its sub-brokers. This will threaten the existence of subsidiaries of Regional Stock Exchanges (RSEs) that are members of the national bourses. There are 21 such subsidiaries registered on the BSE or the NSE and account for nearly 10 per cent of market turnover.

The BSE can help some of the bigger members of these subsidiaries to get together and obtain direct trading membership through new corporate entities. Their regional reach and marketing skills will help bring more business to the bourse and also help spread the equity cult in small towns and cities.

What India needs today is meaningful competition between bourses without any action that will hurt or hinder the NSE’s forward march. This is possible if the BSE’s top management is strong and broad-based enough to encourage new ideas and experimentation and introduction of new trading instruments without sacrificing effective supervision and trading integrity. The BSE is clearly keen on moving in that direction, but it will need support and encouragement in order to make a difference.

-- Sucheta Dalal