Bourses, competition and technology

NUPUR PAVAN BANG | Updated on: Oct 09, 2011

Having more number of exchanges definitely fragments the market as companies can get listed in multiple exchanges

These are interesting times for the Indian Stock Exchanges. We might see a new player in the stock exchanges arena soon, MCX-Stock Exchange (MCX-SX). Since long, MCX-SX's application has been pending with the Securities Exchange Board of India (SEBI) for a license to operate as a full- fledged stock exchange.

National Stock Exchange (NSE), since its inception in 1994, has revolutionized capital markets in India. Due to initiatives taken by NSE, the Indian markets are now more efficient. NSE has monopoly in the futures and options and wholesale debt markets and is the clear market leader in equities and gold ETF trading. This forced financial intermediaries to use technology which provides data feeds from NSE for all segments. On the other hand, BSE has more than 7,000 companies which are not listed on NSE, and hence traders were forced to separately work on BSE's online trading platform (BOLT).

Competition between exchanges

In addition, the Multi Commodity Exchange of India (MCX), market leader in commodity derivatives, provided its feed on software called ODIN, developed by its parent company (Financial Technologies). While intermediaries found it difficult to switch between softwares, they had no choice. These technological woes of the brokers seem to be ending as competition between the exchanges intensifies. While a monopoly does enjoy economies of scale, but competition is always good for the end users. The fear of losing a customer to a competitor propels the companies to innovate, serve and optimize.

Owing to a recent development, wherein the Bombay High Court advised the SEBI to settle its dispute with the MCX-SX regarding its ownership structure which is preventing SEBI from allowing it to become a full fledged stock exchange, in a move to combat the almost certain entry of MCX-SX in the equity and derivatives trading arena, arch rivals, NSE and Bombay Stock Exchange (BSE) are joining hands to provide their stock price feeds through a single trading platform.

In another development just two months back, the Competition Commission of India (CCI), armed with the new competition law which became fully enforceable in the month of June this year, slapped a fine of Rs 55 crore on NSE for waiving transaction charges and abusing its dominant position in the Currency Derivatives (CD) segment. NSE has now obtained a stay by the Competition Appellate Tribunal (Compat) on the penalty, but has ended its zero-pricing policy with effect from August 22{+n}{+d}, 2011. In the same order, the CCI had instructed NSE to share its application programme interface code (APIC) with ODIN users.

Also, Financial Technologies (FTL), the promoter company of MCX and MCX-SX, a global leader in providing exchange and trading technology platforms and solutions, launched DMA (Direct Market Access) live a couple of days back. DMA live will provide clients with greater control and direct access to their trades, reducing transaction costs, increasing speed and efficiency of transaction.

More exchanges

This is meant to benefit the financial institutions and brokers. On one hand the consolidation of exchanges continues, on the other hand new exchanges are successfully capturing market share. Key to their success is technology.

Researchers are still trying to find an answer to whether fragmentation is good or bad for the investors. Maureen O'Hara and Mao Ye in their research paper, “Is market fragmentation harming market quality?”, published in the Journal of Financial Economics in June 2011, find that “fragmentation affects all stocks; more fragmented stocks have lower transactions costs and faster execution speeds; and fragmentation is associated with higher short-term volatility but greater market efficiency, in that prices are closer to being a random walk”. Their results show that “fragmentation does not appear to harm market quality” and “are consistent with US markets being a single virtual market with multiple points of entry”. However, in the US there is the National Market System (NMS) linking all the different exchanges and investors can see prices of all the markets, compare and then choose the best.

MCX-SX, the potential new player in the exchange industry in India, with the backing of a global leader in exchange and trading technology (FTL), may change the game for the existing Indian players, NSE and BSE.

(The author works as post-Doctoral Fellow, Indian School of Business, Hyderabad.)

Published on October 09, 2011
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