Mumbai: India’s battle of the bourses, joined by the month-old MCX Stock Exchange Ltd (MCX-SX), is getting more intense and spreading to new frontiers—incentive offers, technology and global tie-ups. The rivalry between National Stock Exchange of India Ltd (NSE), BSE Ltd and MCX-SX revolves around one dominant theme: liquidity, the largest pool of which is controlled by NSE.
MCX-SX, promoted by Financial Technologies (India) Ltd and Multi Commodity Exchange of India Ltd (MCX), opened for business on 11 February after a long battle with the stock market regulator. It logged a combined average daily turnover of Rs.11.07 crore in 14 trading sessions in February in the cash and derivatives segments combined.
One week after starting trading, the exchange started offering cash incentives to brokers in the cash segment to attract business, becoming the first bourse to do so.
The value of trading on MCX-SX in February compares with a daily average turnover of Rs.1.566 trillion on NSE and Rs.13,534.69 crore on BSE in the 14 trading days of the month.
In the first seven trading sessions in March, MCX-SX’s average daily turnover has risen to Rs.224.48 crore, still a fraction of that of its older rivals. The comparable figures for NSE and BSE in March were Rs.1.197 trillion and Rs.13,674.07 crore, respectively.
The market regulator’s decision to relax the norms for liquidity enhancement schemes on 8 February by allowing stock exchanges to offer incentives in the cash segment apart from the derivatives market seems to have worked for the bourses. The regulator has also reduced the cooling-off period between incentive schemes—or the time gap between the withdrawal of one set of incentives and the launch of the next—from six months to two.
Still, no one is quite sure what will happen once the rewards are withdrawn.
NSE, the leader in the derivatives segment by a wide margin, is focusing on technology and partnerships instead of incentives. The exchange claims its technology is one of the best among global bourses and that it is top in terms of the number of buy and sell orders processed per day in the futures segment.
BSE is fighting the battle on two fronts—it is competing with MCX-SX on incentives and with NSE on technology. And both BSE and NSE are competing with each other when it comes to branding products globally through partnerships with overseas indices. In this space, both are ahead of MCX-SX.
Experts, however, say that branding index products with global names does not work on its own. They say it is too early to write off MCX-SX, noting that its promoters have a good track record of ramping up business and posing a challenge to the competition.
“It is about creating differentiated products that people want to trade, backed by good business development and innovation enabled by good technology,” said Hirander Misra, chairman of Forum Trading Solutions Ltd, a trading technology provider for exchanges.
After the Securities and Exchange Board of India permitted stock exchanges to introduce liquidity enhancement schemes for illiquid securities in the derivatives segment, BSE launched its first liquidity enhancement incentive programme in September 2011, offering cash incentives to market makers in derivatives segment to bring in liquidity and compete with NSE.
Since then, BSE has run nine such programmes. On Monday, it clocked a derivatives turnover of Rs.12,807 crore. In the last week of September 2011, its derivatives turnover was Rs.1.86 crore a day.
Following the initiative, BSE was ranked third by the World Federation of Exchanges in terms of number of index options traded in August 2012. Although the incentive scheme seems to have helped the exchange revive its fortunes, market watchers are apprehensive about the sustainability of trading volumes once the incentives are withdrawn.
The regulator’s decision to reduce the cooling-off period between the launch of incentive schemes may help the bourses.
Globally, incentive schemes have worked in creating sustainable volumes when launched in the right form.
While BSE’s incentive scheme was limited to trading members, MCX-SX went a step further by offering to pay retail investors Rs.100 per day for trading in cash or derivatives segments of the exchange.
In order to encourage its dealers to bring in clients to trade on its platform, MCX-SX offers its top 10 registered dealers from across the country a Rs.1 lakh monthly incentive. The top performer among these dealers will receive an additional Rs.1 lakh.
The exchange also offers to pay a reward of up to Rs.25 lakh to its top five members, based on the combined turnover generated by each in the cash and futures segments.
“The market maker performing up to 90% of their obligation during the month in 20 securities will be entitled to receive an additional incentive of Rs.21 lakh per month, and in case he performs similarly in 40 securities, the member would be entitled to receive an additional incentive of Rs.50 lakh per month,” according to the liquidity enhancement scheme details available on the MCX-SX website.
“All passive orders will entitle the member/investor to receive about 50% of the transaction cost received by the exchange from the active order,” it added.
“MCX-SX looked at pre-launch as if it was focused on the sheer number of members to connect, rather than the right ones with this mix of flow and volume. This missed the fundamental principle of what any new market needs to make it successful—genuine two-way liquidity,” said Misra of Forum Trading Solutions.
NSE does not run any liquidity enhancement scheme on any product, but it does have a battle to fight on other fronts such as foreign tie-ups and technology.
With NSE’s benchmark 50-share index stripped of the S&P prefix after the exchange and the index services provider decided not to renew their agreement, BSE was quick to cash in on the opportunity by tying up with S&P Dow Jones as it seeks to attract global participation in its cash and derivatives segment.
While the arrangement with NSE was for a specified period, BSE has formed a joint venture, and if it works well, the exchange may start seeing some meaningful volume coming from foreign institutional investors in its derivatives segment.
Following the tie-up, BSE managing director and chief executive officer (CEO) Ashish Chauhan said, “Unlike the agreement they had with the other exchange (NSE), this is a 50:50 joint venture and a perpetual company... Several index funds follow S&P indices... This (the joint venture) will make it (Sensex) more tradeable and more invested upon.”
Under the joint venture agreement, S&P Dow Jones will calculate, disseminate and licence BSE indices.
“S&P DJI with its international distribution will help in marketing and monetizing the BSE indices globally. This will increase the revenue from the Index Business for BSE significantly over the next few years,” BSE said in an email.
BSE’s benchmark 30-share Sensex is currently traded in Brazil, Russia, Hong Kong and South Africa.
NSE has traditionally stayed focused on global tie-ups. The largest Indian bourse in terms of volumes has recently signed a deal with Japan Exchange Group for the launch of yen-denominated Nifty futures on Osaka Stock Exchange Co. Ltd. For Indian investors, the NSE platform already offers contracts on S&P 500, Dow Jones and FTSE 100.
“Various products such as derivative contracts, index funds/exchange-traded funds, structured products can be traded (via tie-ups),” said Ravi Varanasi, head (business development) at NSE.
NSE’s Nifty index futures are traded on the Chicago Mercantile Exchange and Singapore’s SGX, while exchange-traded funds based on the Nifty index are listed on the London Stock Exchange (LSE), Tokyo Stock Exchange, Hong Kong Stock Exchange, Stockholm Stock Exchange and Deutsche Boerse.
MCX-SX has a long way to go before catching up with NSE and BSE in terms of global tie-ups. In July 2009, it announced a strategic tie-up with London-based index calculator FTSE to offer new index-based products for Indian investors. FTSE is a joint venture between LSE and the Financial Times, UK.
The new domestic index series was to be created along with a range of international FTSE indices, and listed and traded on the MCX-SX.
However, when the market regulator in January 2011 put out an approved list of 24 global exchanges on which Indian investors could trade, LSE did not feature in the list.
LSE had tie-ups with NSE and MCX-SX then. It could not be ascertained if the tie-ups are still in force.
Technology has for long been the key differentiator between NSE and its older rival BSE. Though both the exchanges claim to have best-in-class trading platform technologies, with market dynamics changing rapidly and the advent of high frequency trading, it has become imperative for stock exchanges to have robust systems in place.
While BSE is planning to join hands with global exchanges or technology providers to upgrade its trading systems, NSE maintains that its technology is already comparable with that of the global top bourses in the world.
NSE, after upgrading its equity derivatives trading infrastructure, has gained the “ability to infinitely scale up the platform, based on the business need, which has increased the capacity to process multi-fold number of messages in a second”, said N. Muralidharan, CEO of NSE Infotech Services Ltd, a wholly owned subsidiary that caters to the needs of NSE and all its group companies. “The round-trip time currently on this platform is in orders of a few hundreds of microseconds,” he said.
BSE is expected to sign a deal with a trading technology provider to upgrade its systems. The exchange is in talks with LSE-promoted Millennium Technologies and the technology arm of Deutsche Bourse, which holds a 5% stake in the exchange.
“We have no urgency. We are in the process of selecting one and expect to make an announcement within two-three months. As of now, it looks like Duetsche will be shortlisted,” a BSE official said on condition of anonymity.
BSE is also planning an initial public offering to provide an exit route to some of its shareholders.
MCX-SX declined to share any of its plans with Mint for this story.