The deadlock between National Stock Exchange (NSE) and Financial Technologies (India) Ltd (FTIL) needs to be resolved soon as it is hurting market participants.
NSE has chosen not to give the application programming interface (API) for its currency futures segment to FTIL, for reasons it has not disclosed. As a result, users of the front-end trading solutions provider either have no access to NSE’s currency futures segment or have to make a separate investment to access it.
FTIL has been rather public about its issues with NSE and has also issued it a legal notice.
Since this stand-off is affecting a large section of market users, perhaps it’s time market regulator Securities and Exchange Board of India (Sebi) broke its silence on the issue.
FTIL’s flagship product, ODIN, has an 80% market share in the market for front-end trading solutions and hence its users form a large portion of the market. To ask them to make a separate investment for trading NSE currency futures is unfair.
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An additional terminal would require more space, curb the ability to trade multi-asset classes from one terminal and require additional work with respect to a firm-wide monitoring of risk. In fact, these firms would have made substantial investment involved with a comprehensive front-end trading solution for these very benefits.
While NSE has kept mum on the issue, the reason seems to be that it is essentially trying to protect its turf in currency futures trading. FTIL-promoted MCX Stock Exchange offers currency futures trading, and the worry seems to be that the group could use its edge in distribution to harm NSE. After all, FTIL hasn’t been barred from providing front-end solutions to NSE’s equity and derivatives segments. The restrictions are limited to currency futures, where the two groups compete.
Samir Shah, managing director of Thomson Reuters India, says, “If a technology distributor is purely a financial investor in an exchange, there is no problem. But if an exchange is promoted by a technology distributor, then there could be a perception of conflict of interest. Other exchanges could perceive that the distributor could put something in the design of the front-end technology which would give it an edge over competing exchanges.”
Thomson Reuters has in the past divested its stake in an electronic communications network (ECN), Instinet, in order to maintain its neutrality and independence to the broking community. ECNs, also referred to as new-age brokers, play the role of collecting orders before they hit the exchange.
It’s important to note here that Sebi approved MCX-SX’s application for providing currency futures trading knowing fully well about its parent company being a technology provider, and the perceived conflict of interest. Since Sebi has already thought it through, any defence by NSE based on the “conflict-of-interest” theory wouldn’t hold.
According to Shah, the solution to the impasse lies not in changing the underlying shareholding pattern, but the governance and the neutrality of the technology companies. What’s more important from the perspective of market participants is that the technology company gives an unbiased and neutral access to all markets in the most efficient manner.
It’s here that Sebi could step in to ensure that technology distributors adhere to certain guidelines. Besides, it could mandate regular audits to ensure that the guidelines are being followed.
It’s not only FTIL and MCX which have an exchange-technology distributor nexus, but even NSE is said to have close links with Bangalore-based front-end technology provider Omnesys Technologies Pvt. Ltd, apart from offering some of its own front-end applications. As Shah puts it, by having clear guidelines, Sebi can create an environment where market participants have efficient access to multiple markets in the most neutral manner.
According to Prof. J.R. Varma of the Indian Institute of Management, Ahmedabad, the regulatory objective in all this should be transparency. “Exchanges are so systemically important that there should be no secrets about their software codes. Exchange software should be open source and available to anyone who wants to produce a front-end system based on it.”
Of course, there should be rules and regulations to protect against misuse and to maintain neutrality. After all, issues such as which quotes are displayed first and which ones are displayed next, which ones are quoted real-time and which ones are delayed, will crop up. But these issues need to be resolved through clear guidelines for distributors, which can be audited and checked, rather than closing the door entirely to a vendor.
That would be a hard pill for exchanges to swallow, considering that they generate a significant sum by selling information. But considering that exchanges are a public utility, regulators would do well make them even more transparent in their functioning.
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