Cut-throat competition can, at times, lead to messy situations. The recent tussle between stock exchanges on trading hours make this amply evident, with the markets regulator having to step in to make sure the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) don’t go ahead with their plan to alter trading timings at short notice. The changes will now happen from 4 January. But competition also leads to many desirable outcomes and increased competitive pressure from BSE is beginning to make a difference in the stock exchange industry. Both BSE and NSE have lowered fees for members, with the former even introducing the concept of maker-taker pricing, something that has facilitated growth of electronic trading in developed markets.
Both exchanges have increased their investments in technology and even their websites have begun sporting new features, which is part of the overall attempt to improve service.
Increased competition has also led to some product innovation. BSE has launched index futures that expire in the middle of the month, rather than the prevailing model where contracts expire at the end of the month. Starting this Friday, the mid-month expiry feature will be extended to single stock derivatives.
Currently, NSE has a monopoly in the equity derivatives market and after the change in its leadership team, BSE has been trying hard to wrest some share of the market. Doing that with contracts that are identical to the contracts that trade on NSE will be difficult. Liquidity breeds liquidity, and traders will naturally put their orders on NSE if BSE has an identical contract with little/no liquidity.
Mid-month expiry is an attempt to differentiate—although the underlying asset (equity) will be identical, the difference in the expiry cycle would result in variations in pricing. One of the factors that determine the price of a futures contract is the time till expiry, and a shorter/longer time till expiry will result in an increase/decrease in the fair value of the contract. This difference in prices will create trading opportunities, points out Sayee Srinivasan, head of product strategy at BSE.
The same trading opportunity currently exists between the one-, two-, and three-month futures contracts that trade on the NSE with the same underlying asset. Note here that liquidity is centred around the near-month contract and although there are trading opportunities between the different expiries, such trading is a small part of the overall market. Besides, BSE also faces the challenge of bringing initial liquidity on to the system. It’s only once there is some initial liquidity that traders will be attracted to the platform. Srinivasan points out that there are a lot of people who want to see BSE’s derivatives platform take-off since having multiple markets will result in more trading opportunities. These market participants will bring in the initial liquidity, he says.
It remains to seen if volumes indeed pick up on account of this new feature, but it’s heartening to note that there is at least some action in the stock exchange space.
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