The US, the world’s most advanced financial market, has 10 exchanges and 76 matching platforms for a population of about 300 million. India has a billion and more population. There is no reason why we should not have more exchanges.
At Exchange Square, the swanky home of MCX-SX, India’s third nationwide stock exchange is revving up for a start in just a few days. One can sense the simmering enthusiasm to get going in Jignesh Shah, founder of the exchange and Chairman of the Financial Technologies group.
When we met up with him recently, he spoke to Business Line with characteristic aplomb about MCX-SX’s ambitious plans to make bonds popular once again, grow the retail investor base in India to a 100 million and bring in new investors from the countryside.
Excerpts from the interview:
You are starting a stock exchange at a time when market conditions globally and in India are in a bad shape. Why launch a new exchange at this time?
On the contrary, I would say that the global scenario now is most conducive for new exchanges. Globally, regulators are now in favour of a larger role for exchanges after the crisis in global finance originated from the OTC markets.
Markets such as US and UK are moving towards routing even OTC transactions through exchanges for real-time risk management. But the opportunity for a new exchange in India goes much beyond this.
Government and regulators in India have taken commendable measures to develop capital markets through policy support and liberalisation. However, I believe exchanges have not taken this opportunity to realise the potential. After two decades of reforms, what we have today is highly skewed market structure that does not help pursue growth.
The public perception in India is that the capital market is about an exchange, electronic trading, an index and volumes in one or two products. But the volumes we talk of are confined to one or two speculative products that have no bearing on either the requirements of the economy or of the companies.
Priorities such as capital formation, corporate bond market, product innovation and market penetration have been grossly overlooked. This trend is eloquently authenticated in a reply to the Parliament question which revealed that a few hundreds of investors dominate trading (including derivatives) in Indian stock exchanges.
We are committed to fundamental changes in this market structure. We will try to offer retail investors products that they will understand, reach out to them in a large number of cities and towns and encourage intermediaries through innovative pricing. We will try to take capital markets from around and within the Bandra-Kurla Complex, to the length and breadth of the country.
US, the most advanced financial market in the world has 10 exchanges and 76 matching platforms for a population of about 300 million. India has a billion and more population and it needs no explanation why we need more exchanges.
The BSE and the NSE already trade over 6000 stocks between them, with futures and options on many of them. Why should an investor come to you when he has so many options?
Rather than looking at what an investor has now, you need to see what you can provide him with. Ten years ago a user of phone could only use it to make calls. Today with a phone he can make calls, take pictures, listen to music, watch videos, write notes, maintain a diary, so much more.
We hope to come up with products that investors will find it easy to understand, gauge downside risk on and know when to exit. We have plans to penetrate all the district centres in India with more bond market products. The countryside of India is generating huge wealth that is unfortunately going into assets such as real estate, whereas it should actually be the major source of financing for India’s economy.
What is the current status of the 700 members you have enrolled? And of the 700, how many belong to other exchanges?
In the first month of our membership drive, we got 700 members which is a sort of record. From our understanding, BSE when it began had about 318 members and NSE about 140. This is testimony of the faith market intermediaries have put on us.
For MCX-SX, professional category and rural entrepreneur members (they form about 10 per cent of the total) are first-time members, as a precondition for this membership is that they should not be a member of any exchange. Other members will most probably common to all the three national exchanges. We are not here to woo members away from other exchanges. There is plenty of space to expand without doing that.
You have said a lot about retail penetration. Any number you have in mind in terms of the number of investors you will target?
We will make every attempt to create an investment culture that draws in a large number of investors. We hope to work with all related institutions including exchanges, intermediaries, depositories to take the number of investors to at least 100 million in the next ten years. China has already 160 million investors. I don’t think this is too ambitious. We can achieve much more if we are all in this together.
You had some strong views on co-location (facilities that allow institutions to locate their servers within the exchange for hi-speed trades). Why? What is your comment on the recent episode of the flash crash?
Co-location brings inequality into the equity market. I remember during the open outcry days, members with badges had the privilege of being closer to the market counters.
That was an undue advantage which we all thought has gone away with the introduction of electronic trading. I am not able to see how the co-location advantage now is different from this in spirit.
Co-location enhances revenues and profits for exchanges. But the priority in the Indian markets is not the length of cord that links servers, but resolving larger issues such as new instruments for capital formation, market deepening and innovation.
In the latest episode in India that led to a brief halt of the market, it was said that the queue at the gate could not be controlled. But I would argue that if we can’t handle speeds of 10 milliseconds, it is better that we don’t have it at all. Exchanges should share evidence with the market professionals and regulators on how these facilities operate. India is bestowed with superior skills and expertise in technology. This should be more effectively used to empower investors and democratise markets.