After months of bickering and trading charges, Indian stock exchanges seem to be coming to terms with each other. Last week, National Stock Exchange of India Ltd (NSE) and BSE Ltd issued separate but identical press releases, saying their members can connect to each other’s servers in co-located facilities and can also provide inter-exchange algorithmic trading solutions. Co-location facilities enable members to set up automated trading systems in the same building as the exchange. The statements also said all of NSE’s market segments will be available for trading on an Internet-based front-end trading solution provided by BSE’s technology subsidiary, and vice versa with BSE’s market segments.
These issues have been festering for the past two-three years. Another conflict related to the use of technology, that had dragged on for about three years, was resolved between NSE and Financial Technologies (India) Ltd, after the two filed consent terms with a court.
Each of these cases is complex and both sides to the conflict will provide ample justification for their actions. But without getting into the details, it’s important to note that Indian exchanges have been battling each other in the area of technology for the past few years now. In the process, market participants have been disadvantaged. Because of the tussle between NSE and BSE, market participants weren’t able to employ simple algorithmic trading solutions such as smart order routing—a technology which enables members to electronically execute a trade at the best possible price.
The root of all these problems is the fact that unlike most exchanges world over, Indian exchanges either have an ownership or are owned by a front-end trading solutions provider. As a result, they are involved in the distribution of each other’s services. This creates a conflict of interest, or at least the perception of one—that a solution provider could potentially discriminate against competitors when disseminating data. Other exchanges will be concerned that the distributor could put something in the design of the trading technology that will put its affiliated exchange ahead of others.
One way out of this muddle is to rely on regulator audits to ensure that there is no such design. The recent agreements between exchanges appear to be based on such checks and balances.
It makes sense for the markets regulator to frame guidelines for distributors and look into their regulation as well, so that market participants don’t have to wait for two-three years for technology related issue to get resolved.
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