Currency futures trade is new front in BSE-NSE rivalry

Currency futures trade is new front in BSE-NSE rivalry

Mumbai: The Bombay Stock Exchange Ltd (BSE) Asia’s oldest stock exchange, launches currency futures on Wednesday in a renewed effort to catch up with 16-year-old rival National Stock Exchange Ltd (NSE).

The 133-year-old BSE said “there is enough space in this segment". Market participants, however, are not too sure how BSE will be able to best NSE.

The older exchange trails in most businesses in which it competes with NSE.

“We are hopeful of generating satisfying volumes for ourselves," said M.L. Soneji, chief operating officer, BSE, in an emailed response. That may not be easy.

None of the stock exchanges or the Multi Commodity Exchange of India Ltd, which has also got an approval from the regulator, the Securities and Exchange Board of India to start trading in currency futures, would reveal how many brokers and banks have signed up for trading. An email query sent to NSE remained unanswered.

Also See How they compare (Graphic)

The Reserve Bank of India has allowed a standard $1,000 rupee-US dollar contract in the currency futures market and exchanges are not allowed to offer different contract sizes or product innovations to woo clients.

In a month since this product started trading on NSE, the average volume has been around 56,600 contracts daily, worth $56.6 million (Rs265 crore), thanks to so-called margin requirements and the low limit on volume. The first requires traders to deposit a certain proportion of the value of their contracts with the exchange, and the second makes currency futures irrelevant for large companies. The daily turnover of India’s foreign exchange market is about $48 billion.

“Any exchange has to find its own business model," said a broker, who has a membership with both BSE and NSE and wished to remain anonymous for that reason. “Unfortunately, BSE tries to emulate NSE rather than create its own business model."

In currency futures, NSE has a headstart over BSE. In the so-called cash segment, where shares change hands, BSE had the first-mover advantage. And in the futures segment, both exchanges started simultaneous trading in June 2000. Today, NSE has a virtual monopoly of the market with average daily futures and options trading turnover of Rs45,827 crore this financial year, while BSE’s has slipped to around Rs20 crore.

Over the years, BSE has let its market share slip due to a stock market scam, inability to adopt new technology faster and resistance to change from its members.

It was rocked by a scam in 2001 when Mumbai-based broker Ketan Parekh rigged the price of several scrips and brought down two banks from which he borrowed money for share purchases.

“The scam...led to BSE members shifting (trading) to NSE," said M.R. Mayya, former executive director of the exchange.

It is time for them to switch back, he added. Since the scam, BSE’s derivatives trade stagnated while NSE’s took off. To be sure, many brokers maintain accounts with both the exchanges. BSE has 982 members, a number comparable with NSE’s 1,009.

The loss in market share also finds its way into BSE’s financials. Most of the exchange’s revenue comes from its investment income. According to its annual report, in fiscal 2007-08, the exchange derived around 42% of its Rs420.4 crore total income from treasury operations or investments.

For NSE, the comparable figure is 12% for 2006-07, the last year for which figures are available. NSE’s total income for the year was Rs623.5 crore, up 32% from a year ago.

Liquidity attracts players

“It’s liquidity that attracts a player," A.V. Rajwade, an independent foreign exchange consultant told Mint in a recent interview.

According to Rajwade, more players leads to still more liquidity, which becomes a “virtuous cycle" that sustains an exchange.

In the cash market for equities, BSE had an average daily turnover of Rs2,724 crore in 1999-2000 compared with Rs3,303 crore for NSE. In the eight years that followed, during which foreign investors pumped in more than $47 billion in Indian equities, BSE’s turnover has grown to Rs6,094 crore while NSE’s has multiplied more than four times to Rs14,148 crore.

When it started in 1994, NSE decided to do away with the open outcry system of trading and adopted information technology. Keeping in mind the poor telecom infrastructure in those times, it used VSATs (very small aperture terminals), which use satellite communication, to match trades online. In the face of stiff resistance put up by brokers who didn’t want to change their old open outcry system of trading, BSE could not raise enough resources for computerization and it faced regulatory hurdles that restrained it from admitting new members.

NSE’s move reduced the cost of trading significantly, said R.H. Patil, the first chairman of the exchange and currently, chairman of National Securities Depository Ltd.

BSE holds its delayed expansion to other parts of the country responsible for losing marketshare. “BSE’s market access was restricted to Mumbai, which had an adverse effect on its business," said Soneji. The exchange was allowed to have terminals across the country only in 1997, almost three years after NSE.

NSE is owned by financial institutions. In contrast, BSE, till recently was owned and run by brokers and many of its problems such as executives leaving the organization and inability to increase market share are perceived to be due to interference from brokers.

Rajnikant Patel, former CEO of BSE who resigned on 9 August, said: “Any organization that had a different structure in the past...when it’s changing its mindset, this transfer is always slow and long-drawn-out process."

National importance

Patel said it did not make sense to “look at it (BSE) only as a business. It’s an issue of national importance…and helped many companies raise capital."

That, though, doesn’t seem to have cut any ice with investors. BSE sold 5% stakes to Deutsche Borse AG, a German exchange and SGX, which is based in Singapore, at Rs189 crore each. At this price, the exchange is valued at Rs3,780 crore. NSE sold a 5% stake to NYSE for $115 million, which values the exchange at Rs10,695 crore.

Soneji claimed the two foreign exchanges would bring their “best practices, technological expertise, product portfolio and global customer network to BSE".

Like him, there are others bullish on BSE’s future. K.R. Choksey, who founded a brokerage named after himself is one. He said it helps that BSE has more stocks listed—5,010, almost three times NSE’s.

Patel, BSE’s first chief executive officer, is another. The BSE theme is still his mobile phone’s caller tune.

The exchange can go only in one direction, he said.