Dissecting the dissent note

Lokeshwarri S.K. BL Research Bureau | Updated on June 08, 2011 Published on June 08, 2011

Much has been written about the note of the two members who dissented with the majority order in the ongoing case for determining if NSE resorted to predatory pricing in the nascent currency derivative segment. The important fact to note is that this is but the opinion of the minority members and not the ultimate decision itself.

A closer look at many of the arguments put forward in the dissent note shows that they are open to debate. A major portion of the document has centred around what constitutes ‘relevant' market. While the Director General of the Competition Commission has held the entire stock exchange including all the segments such as cash market, WDM, equity derivatives and currency derivatives (CD) as the ‘relevant' market, the dissent note says that these are separate asset classes with different target consumers and hence the relevant market ought to be just the currency derivative segment of stock exchanges.

NSE's share in CD

A definite conclusion is difficult on this score and may be subject to interpretation. But even within the CD segment, the dissent note claims that NSE does not enjoy dominant position. Market share of the three exchanges — NSE, MCX-SX and USE — upto October 2010 is provided to support this argument. The note states that by October 2010, the share of the three exchanges stood at 33, 38 and 28 per cent respectively. Since new exchanges were able to enter and eat into NSE's share, the note concludes that NSE does not enjoy a dominant position.

The data supplied to support this argument may not be sufficient enough to reach a definite conclusion. It is widely known to watchers of the CD market that USE's volumes spiked in the first two months since launch (September 2010) and then whittled down subsequently. From daily average turnover of Rs 27,000 crore in the month of its launch, USE's turnover dipped to Rs 1,300 crore by December.

It is, therefore, not correct to look at the market share data for October 2010, that was highly skewed by the initial interest in USE. On the other hand, the market share of NSE, MCX-SX and USE in the first seven days of June is at 46, 36 and 18 per cent respectively. So, according to latest figures available, NSE does enjoy a greater share in CD segment too.

Reduction in share

The note further states that NSE's share came down from 100 per cent to 33 per cent in two years showing NSE's inability to influence the market. Since we are talking about a new market segment, reduction in share from 100 per cent to 46 per cent is not surprising. And then competitors were able to garner share only at the cost of putting their existence into jeopardy, by charging zero transaction fee too.

Predatory pricing

While the Competition Act states that pricing goods or services below cost with a view to reduce competition is predatory pricing, the dissent note argues that the initial zero pricing was done with the view to increase liquidity and not for thwarting competition. The key here is in determining whether extending this practice for over two and half years can be justified as giving an initial thrust to liquidity.

The note further states that competitors having entered the segment well aware of the incumbent's transaction charges should have thought of alternative revenue streams to sustain the business. However, both USE and MCX-SX have stated that they were hoping for the predatory pricing issue to be resolved soon so that they could begin charging transaction fee.

Interest of consumer

The original order held that NSE used its dominant position in equity derivatives market to protect its share in currency derivatives. The dissent note argues that leveraging of market power becomes an issue only when it leads to competitors shutting shop, which ultimately harms the consumer. This argument is flawed because though there are no foreclosures yet, if the state of affairs is allowed to continue, some of the competitors would be forced to shut down.

To look at the notional value of contracts traded to conclude that the two competitors are thriving would be erroneous since the revenue they earn from operations is zero.

Such a pricing strategy cannot be said to be in the interest of the consumer either. Once all competition is eliminated, the only remaining exchange would likely to hike charges.

Published on June 08, 2011
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