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P. Devarajan

BANKS have started mock runs on the screen-based, anonymous order-driven trading system for the gilts markets, which will get rid of brokers. The Reserve Bank of India is testing the system to avert any glitches before it goes live by December. "It could be earlier, but the RBI wants to play safe," said a top bank official.

At stake are the commissions earned by brokers and sometimes split with dealers in the gilts market under the extant telephone-driven Over The Counter (OTC) market accounting for 80 per cent to 90 per cent of the debt trades in the wholesale debt segment.

On a market lot of Rs 5 crore, a broker typically earns a commission ranging between Rs 2,500 and Rs 3,000 and much higher in sweet bulk deals. At present, gilt trades are struck on phones and reported on the Negotiated Dealing System (NDS).

Dealers are quite unhappy with the NDS being unable to report all the trades owing to time lags. There are hardly any quotes on the screens and about 160 participants do not get all the quotes on a particular Government paper at any given point of time. That makes the market prefer telephone deals, with the NDS failing in fetching prices on transparent deals in gilts, going by whining primary dealers.

About six to seven traders rule the gilts market, with other traders routing business through them (or on behalf of them) to get round the rule of NDS members not offering more than 5 per cent of their business to a single broker. Trades are concluded over phones and punched on the NDS within about 15 minutes, denying trade information to all the players at the same time.

NDS, which commenced operations on February 15, 2002, has not helped any; it was not probably given a chance. An interim report in February 2004 and a final report by the RBI working group under Dr R.H. Patil, Chairman, Clearing Corporation of India Ltd, to study gilts trading are in; it is not yet out in public domain.

Inquiries indicate the working group has favoured setting up of an automated, order-matching system to make gilts trade clean. The new system will link the country with NDS members having head offices outside Mumbai being tied to the system and placed on par with the Mumbai-based players. The electronic system works on the rule of price-time priority premised on the trade logic that a seller prefers the highest price from the buyer and the buyer the lowest quote from the seller.

The anonymous orders (buyers and sellers will not be identified) will be matched electronically with the software written by TCS. For instance, at 9.30 a.m. on a particular trading day if there are two sell orders, preference will be given to the lowest quote; if at the same time, there are two buy orders, preference will be given to the higher quote, with technology matching the buy-sell quotes.

In the process, the order-driven market will reduce the buy-sell spreads with the price discovery being made in public. The electronic platform will help straight through processing (STP) - trades will be struck, confirmed, cleared and settled at CCIL, which will guarantee the trades and further at the Public Debt Office of the RBI.

Indications are the NDS will be managed by the RBI and its officials will be able to spot price rigging to cancel such deals. The order matching system could be placed on the financial markets in three phases, starting with trades in a few liquid Government paper. In the second phase, more gilts could be added, with the third phase including all gilt trades.

Bankers feel the RBI should be overseeing trading on the new module as Government borrowings are still on the high side and interest rate movements are critical to the economy.

The central bank will be allowing primary dealers and bank treasuries to trade on both the channels in the hope that lower costs (no trade commissions or stamp duty) will wean the market to the order-driven option.

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