The National Spot Exchange Ltd fiasco is a lesson for exchanges and investors to go by the book and not to be lured by high returns alone.
Ashishkumar Chauhan, MD and CEO of the 140-year-old Bombay Stock Exchange, in an interview with Business Line , spoke of the responsibilities of an exchange, as also BSE’s future plans. Excerpts:
What has been the impact of the NSEL fiasco? What are the lessons learnt?
Ultimately what is an exchange? It is a connection of investors, brokers, processes, computers, and procedures that have evolved over a period of time, where there are checks and balances, risk management systems, knowingly or unknowingly, written or/and unwritten, are put in place. Many called me and asked, what is the guarantee that you would not go down? FIIs too asked many uncomfortable questions.
Certainly, we have learnt. We keep on checking on a variety of parameters, concentration of open positions with a few people, open position on stocks and concentration of banks in giving guarantees. The lesson is how to create a framework which does not depend on a few market participants.
Investors too need to learn. It is tough to learn by losing so much money, but if we do not, such mishaps will continue.
Barring BSE 100 and Sensex, derivatives on other indices have not taken off. Why?
Internationally, out of every 100 products launched only two succeed. If you think, what is the point in launching them then the 2 per cent success may not happen. Interest rate futures which have been in India for five years, succeeded only after it was modified.
You cannot be impatient. If you remember, there was not much of trading on the NSE’s derivatives segment for the first couple of years. It picked up later.
BSE’s SME platform was launched six months post approval. Then the first company got listed. The next listing came after three or four months and it took a year for people to get used to the idea of SME listing. Next month, we have 15 more listings.
RBI curtailed banks from exchange-traded currency derivatives when the rupee depreciated last year. How will you grow this segment?
We started currency derivatives in December 2013. In about 45-50 days we have reached 18-20 per cent market share. This segment does not have any incentives from BSE and still has achieved a significant market share. We have done it on a new technology platform which provides 200 micro seconds response time and is about 50 times faster.
Of the 225 applications from brokers for the currency segment, about 60 have started trading. The numbers will be similar in terms of the numbers of brokers trading on other exchanges.
Going forward, many interesting parameters such as three-legged and four-legged orders will be introduced so that people can get used to the speed as well as the complexities.
In the absence of complex order execution, brokers have to execute the orders outside the system. Our system provides all of the multi-legged strategies.
How will you ensure that interest rate futures would be traded daily and be liquid?
For us interest rates futures have an important role in India. Whereas everyone has exposure to interest rates in the form of deposits, credit cards, home loans and the like, very few have equity exposure whereas everyone has exposure to interest rates in the form of deposits, credit cards, home loans and the like.
We have got several banks, insurance companies, NBFCs and primary dealers who want to trade. Internationally, interest rates and currency are about $5 trillion a day of trading volumes. Compared to this, equities are a few hundred billion dollars a day.
How much time did it take to introduce the futures?
It took us five months. We have been experimenting with a newer pricing framework (maker-taker). If a person is providing liquidity (maker) that is if his order is sitting in the market at the limit price, he gets charged lesser than the persons whose order hits the maker’s order. So, the taker is charged more.
We are exploring implementation of this model in currency, interest rate, equity derivatives and many other places.
BSE was disallowed a stake in Computer Age Management Services a few years ago by SEBI citing conflict of interest. Now NSE has been allowed.
All regulations have to be implemented in a transparent manner and in a manner that is equitable.
What happens to your stake in United Stock Exchange?
BSE holds slightly less than 15 per cent in USE. And, BSE already has started currency and interest rate derivatives post discontinuation of the USE shareholders agreement. We need to decide what to do with our stake in USE.
Your progress in the IPO front…
BSE will have to take a call on which exchange it will list on, as self-listing is not allowed, as and when the approval comes. We had applied to SEBI for in principle approval in January 2012.
You have 45 SMEs listed but only a few of them have traded. Why?
In fact, 10 have traded. SMEs are small and have 50-200 shareholders when they list. Most investors would trade once in 10 years. If they were speculators they will trade every hour each day.
Many are misled that trading is the most important function of an exchange. Effectively, an exchange is a vehicle for capital formation, though there is no doubt that exchanges derive their income from trading. I feel, measuring trading volume was basically promoted by the exchanges themselves to project their superiority.
Society needs to measure exchanges on the capital formation they do and the number of newer investors they bring in every year.
In the last 20 years, India does not seem to have added any new investors, despite the automation. This, I think, has been a failure on the part of exchanges. If I say, I have added many speculators then it is a disservice.
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