Sebi cannot duck its responsibility in derivatives ban: Marti Subrahmanyam

Mumbai: Indian exchanges’s decision to restrict data feeds with a view to curb derivatives trading on Indian equities in offshore destinations is not in the country’s best interest, said Marti G. Subrahmanyam, Charles E. Merrill professor of finance and economics at the Stern School of Business at New York University. In an interview with Mint, Subrahmanyam also said that the Securities and Exchange Board of India (Sebi) can’t abdicate its responsibility by saying that these were commercial decisions of exchanges.

How do you see the move by Indian exchanges to restrict the use of their trade data? MSCI claims the move is anti-competitive.

India cannot aim to be the best in the world, while at the same time shutting off competition from elsewhere. That would be like hosting a world cup in soccer where you are the only team competing, and then proclaiming yourself champion. No, the name of the game is to measure up to world standards and compete. This is even truer of financial markets, where the name of the game is competition and being the lowest cost venue. History is replete with examples where this dictum was ignored with adverse consequences, from the establishment of the Eurobond market in London in the 1970s to the diversion of market liquidity from many major equity markets in Europe to London in the 1980s.

What do you think will be the consequences of the move by the Indian exchanges?

The recent restrictions placed by Indian exchanges are against our own long-term interests: providing fair, competitive markets for our own investors. Investors will gravitate towards venues that provide best execution, greatest liquidity through the lowest transaction costs, minimal frictions in terms of regulatory costs. If those venues happen to lie outside, so be it; we simply cannot stop the waves, King Canute-style, by forcing people to come and trade onshore. Global investors, mutual funds, hedge funds, and sovereign wealth funds, will simply refuse and trade elsewhere, where liquidity is greater. That only adds to the fragmentation of liquidity, and increase frictions and will, ultimately, be counter-productive. Rather, Indian exchanges prodded by the regulator ought to attempt to improve access to win back volumes by providing liquid, transparent markets.

Speaking of the regulator, can you elaborate on what Sebi’s role should be in this issue? It has said this is a commercial decision made by the exchanges.

The markets regulator, Sebi, cannot duck responsibility by saying it is the exchanges’ commercial decision. The regulator’s mandate is to work in the interest of Indian investors and provide fair, competitive markets. Any restrictive move ultimately affects Indian investors as it is anti-competitive, and will result in reduced capital inflows, which means greater liquidity and risk premia, lower valuations and slower price discovery for Indian equities.

Is there a precedent for such restrictions on data? What is your view on the debate that data generated by exchanges is a public good?

Whether exchange data are a public good is a debatable issue. After all, the data are generated based on infrastructure owned and paid for by the exchange and its constituents; as such, it makes sense for the exchange to enforce a reasonable charge while disseminating the data. But there is no argument for preventing access or putting unreasonable strictures on the use of the data. This is a global issue that many academics face in assembling data bases for their research. These restrictions only delay the messenger, who will ultimately deliver the message, but previous time is lost meanwhile. Evidence-based decision making ought to be the hallmark of policy action for government and regulatory bodies and research is necessary to provide such a basis.

What is your view of the alternative trading venue that has been created in GIFT City, which Indian exchanges are saying matches offshore centres on taxation and also offers currency risk mitigation?

I would make two points. First, regulatory and government policy ought to make existing infrastructure work, rather than create additional infrastructure, some of which may not be in consonance, and may even have unintended consequences.

For instance, why can’t NSE be open for Nifty futures trading when Singapore opens? After all, one of the unique features of Singapore is that it is 2.5 hours ahead of India and SGX has parlayed that into a competitive advantage. How can innovations such as longer trading hours happen only in GIFT City?

Second, I cannot think of any market that has been established by regulatory fiat or administrative action, which is something that our bureaucrats and politicians have to come to terms with. Markets grow organically, which is the reason that markets in London, Amsterdam, Osaka and Chicago have thrived since the seventeenth century. Ditto for the exchanges in Bombay and Ahmedabad that started to trade cotton when supplies from the US were disrupted after the Civil War in the mid-nineteenth century.

There is a confluence of circumstances that result in the creation of markets; expecting a market to get established based on tax incentives or other bureaucratic action ignores history. Although I know little about GIFT City, I am willing to wager that market makers and other trading professionals will not pack their bags in Bombay to catch the Gujarat Mail in a hurry.