The Hindu Business Line : `Trading' the exchanges

The public floatation of shares at the Multi Commodity Exchange (MCX) has moved a step closer to reality in the wake of regulatory clearances received. The development is not something new as globally many stock and commodity markets have restructured their ownership to provide for public participation, with the New York Stock Exchange being the latest to join the ranks.

On the face of it, it may seem somewhat ironic that an institution that facilitates commerce in commodities/stocks should itself offer its own shares to be bought and sold by the public, using the very infrastructure it has created for trading in stocks of other outfits. But this is only a logical outcome of the technological changes that have happened in the trading framework. It originated as a system where participants expressed on the trading floor their requirements (buy/sell) to others in what was called an `out cry' system. Since enforcing contractual commitments is critical to the successful functioning of the market, it was only natural that trading should be confined to a limited set of players each of whom enjoyed the confidence of others. Also, given the stakes involved, it meant that each member specialised in a select list of commodities/scrips in which he makes a market by offering to buy/sell. Consequently, the discovery of a `fair' price was often dictated by personal preferences/inadequacies of the so-called specialist rather than through a genuine inter-play of demand-supply forces occurring in real time. It is only natural that with the advent of technology for facilitating on-line trading and the opportunity for genuine mass participation in the price discovery process that it afforded, the traditional notions on the appropriate governance structure for a commodity/stock market have come to be challenged. For, if the specialist trader-member is not seen as some one possessing exclusive knowledge or that his presumed financial capability is not such a proprietary piece of advantage then it follows that other superior models of governance must be explored and adopted.

But demutualisation and consequent public ownership of shares is not without its regulatory challenge. As a listed corporation an exchange's drive for maximising its own profits could potentially conflict with the broader public good of providing a fair and efficient market for corporate capital. How well it would be able to perform its assigned role in the event of another listed corporate acquiring a dominant stake in it? Or, worse, would the management of the exchange be able to enforce its stringent norms on insider-trading on promoters' dealings in its own stock? But daunting as these challenges are, they do not defy a solution. Certainly not for a regulator, with an active agenda of supervision.

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