Mumbai: With MCX-SX Ltd, India’s newest stock exchange, warming up to launch its equities trading soon, the battle for market share among stock exchanges is set to intensify. In an interview, BSE Ltd’s new chief executive officer Ashish Chauhan outlines the challenges that Asia’s oldest bourse faces and its strategy to fight competition. Edited excerpts:
What’s your strategy to grow the business at a time when competition is intensifying?
There are certain broad aspects to an exchange’s activity. You need to have a technology which can be scaled up, is flexible and is fast to respond. It should also be compatible with new products. You need the right people who understand the business well and are able to work within regulations and create new products. You need to keep fine-tuning existing offerings while developing new ones.
There is a way to differentiate and create new products. Then there is distribution, which is key to bringing in more participants.
An exchange needs to measure itself in terms of providing more transparent, fair, efficient, orderly and cost-effective platform. Finally, there are external factors like the taxation of your industry vis-à-vis similar industries. The business growth in some sense is an outcome of these activities. If you do the right thing, the business will grow.
The new rules for market infrastructure institutions are in place. How soon will you be able to comply with those?
BSE is more or less compliant with these regulations, in a sense that we today have a board with more independent directors than shareholder directors. We now have only shareholder directors who are not member brokers. As per the new rules, exchanges should have a minimum 51% stake in clearing corporation and we have a 100% stake in our clearing corporation. In the depository, however, we have a higher stake than the mandatory level but we have three years to bring that down. So, there is no urgency.
The new rules also place a cap on remuneration in market infrastructure institutions. Is that a constraint in attracting talent?
They have put a framework on that—aimed at creating some discipline—and it is not a constraint. They are not telling us the exact amount of remuneration that needs to be paid. It says there should be a compensation committee that has to approve remuneration and we already have a committee. Another thing is you cannot give stock options to employees. There is a cap on bonus as well.
The liquidity enhancement plan has seen increased participation in your derivatives segment, especially in options trading. However, open interest numbers do not support this claim.
It is like a cricket commentator comparing one player’s century to another’s. It is their right to comment, but ultimately a century is still a century. Every market evolves in a different way and a market characteristic, at a particular point in time, may not be comparable to a new and upcoming market. One year ago, there was practically no trading volume or open interest in BSE’s derivatives segment. Today, the value of total open interest on a daily basis is in the range of Rs.3,000-3,500 crore. On a trading volume versus open interest basis, it should be comparable with the country’s leading exchange.
Industry watchers say the numbers are propped by market makers than by any real trading interest.
In the beginning, we had more proprietary and algorithm traders who were the first movers. Now our challenge is to keep them interested so that they give two-way quotes and create liquidity, thereby attracting more retail participants and foreign institutional investors (FIIs).
The good thing is that in first 11 months we had only 2,500 retail investors who participated in derivatives. In last one month itself we have 25,000 new investors.
You can see retail investor interest building up and FIIs are coming in.
There are different categories of participants coming in with some of the retail brokerages promoting BSE derivatives because it saves a lot of cost for investors and brokers.
Today, BSE has the lowest cost in derivatives in India and it will continue for the next ten years.
NSE has a near-monopoly in derivatives business as of now. With MCX-SX going live soon, will it affect BSE’s derivatives business?
It all boils down to value for money. Starting with membership deposit, we take Rs.10 lakh while the upcoming exchange charges five times more and the incumbent one takes ten times.
We are between 10-20% of the competition on initial membership deposit.
We charge Rs.5,000 as annual membership fee while the upcoming exchange charges Rs.5 lakh and the existing one also charges a reasonably high amount.
Coming to transaction charges—we charge Rs.50 per Rs.1 crore worth of options premium. The new exchange charges Rs.5,000 and the incumbent exchange charges Rs.10,000. That means a saving of more than 99% if you trade on BSE.
Option trading today forms the largest payout from brokers to the exchanges. If they are able to save 99% on that, it is pretty large. That explains why more traders are coming to BSE.
Similarly in futures, BSE’s transaction costs are close to 90% lower than what the existing exchange charges and probably 40-50% lower than what the new exchange will charge. Slowly, people are realizing it.
Technology has been the edge for NSE for a long time and the new entrant also claims to have a world class trading platform. How do you rate your technology?
There are many ways to measure technology. In terms of scalability, response time, network latency and so on. Today we receive eight crore orders a day, which puts us among the top exchanges in terms of number of orders. In terms of number of trades per day, we are the seventh largest. I think NSE is the first.
In terms of speed, we have a 10 milliseconds response time which puts us in the top quartile in the world. We are pretty much among the fastest and most scalable exchanges in the world. But how do we break into the top 10%? For that the exchange keeps on striving to improve its network, its trading systems, hardware and also optimize these continuously.
But technology is not the only factor. It is the overall package.
So, for users, end-to-end experience is what is important. Each component may have its own importance.
We have been able to improve the package substantially over the last three years.
So if the competition charges 10 times more and they are only, say, 2% better in the overall package, the value for money equation tilts in BSE’s favour.
In India, especially in the broking industry, everybody is searching for that value for money proposition and BSE scores high in that regard.
Still, NSE is far ahead in the derivatives segment, where the volumes are.
In early 1990s, there were 22 exchanges before NSE came in and the packages offered by them were different from what the new automated exchange had to offer.
So, people migrated to the new exchange as it offered better value for money. Now, people are moving back to BSE for the same reason. if they can save over 99% for a similar package, why would not they shift back?
The market regulator is planning to come out with a common stock filter to prevent flash crashes like those that recently happened on NSE. Is the Indian stock market ready for algorithmic and high- frequency trading?
Internationally, there are different instances of algorithmic as well as human errors, causing such flash crashes. It is not something unique to India. India has led regulatory thinking in stock markets for many years now.
Many of the regulations that the Securities and Exchange Board of India has come out with have been replicated all over the world. So, India has onus to come out with a good framework that will allow algorithmic and high-frequency traders to come in an orderly manner and also benefit other participants. By discussion, debate and applying collective wisdom of the industry, we will come up with practical solutions.
When do you plan to list the exchange?
We are in talks with some bankers and if things go well, we expect to list by April-June of next year. Valuation is something that the market has to arrive at.
With competition increasing in the core business area, we have seen exchanges creating niche segments such as SME platforms to grow. Any plan to explore new businesses?
Ten years back, derivatives was a niche for NSE. Today, it is the main business. So, exchanges need to evolve in different products. We need to grow in our equity and derivatives segment in a significant way. But we are strong in other segments such as SMEs, QIPs (qualified institutional placements), IPOs (initial public offers), retail and institutional debt and so on. In fact, we have a dominant market share in these areas.