Mumbai: India’s two main stock exchanges on Wednesday agreed to share software platforms, a move expected to significantly boost liquidity in the country’s equities and derivatives market and benefit brokers of both the bourses.
Signalling the beginning of the end of a bitter rivalry between BSE and the National Stock Exchange (NSE), the bourses said in separate statements their members will now be able to connect to each other’s servers in co-location facilities offered by both or other third-party infrastructure providers.
The statements of both exchanges also said that all BSE market segments would be available shortly on NoW (Neat on Web), a facility provided by DOTEX, a subsidiary of NSE. Similarly, all NSE market segments would be available on Fastrade on Web, a facility provided by Marketplace Infratel Pvt. Ltd, a subsidiary of BSE.
A co-location server allows brokers of an exchange to place their own server in the same place as the exchange’s trading engine. This facilitates faster access to order book data streamed from the exchange. This is crucial for broking firms that offer direct market access and algorithm facilities to customers as it enables faster trade execution.
Members can also provide inter-exchange algorithmic trading (AT) from the co-location servers or locations outside, both exchanges said. AT refers to orders automatically placed in the market by software programmes designed to detect an arbitrage opportunity between the cash and the futures markets on an exchange in real time. Such electronic trading offers a number of arbitrage opportunities to members, leading to higher liquidity and better market stability.
NSE enjoys a dominant position in both equity and derivatives segments. AT may lead to increased order flow at BSE to take advantage of arbitrage opportunities vis-à-vis NSE. This may help BSE revive its otherwise dormant derivatives segment. To be sure, there are a few other technologies where disputes between the two exchanges are yet to be resolved. One is related to the so-called smart-order routing (SOR).
India is among the few markets in Asia where the same stocks are listed on two different exchanges. When a broker executes a client order, it should be done at the venue that offers the best price at that given time. SOR takes this principle forward, since it enables best execution in the world of electronic trading.
One of NSE’s main contentions was that both exchanges should have a reliable audit trail to ensure that an investor dispute can be addressed well. The audit trail will act as proof of which exchange offered a better execution price at any given point in disputed cases.
BSE has been claiming that NSE has been delaying the introduction of SOR because of fears that it may lose some of its share in order flow once the technology is allowed. The two exchanges plan to come up with a common framework to ensure that SOR can be implemented and talks are continuing on the matter.