Home / Opinion / Why BSE’s cheekiness is not appreciated in some quarters

A week ago, the chief executive officer (CEO) of BSE Ltd tweeted that the exchange has become the fastest exchange in the world with a median response time of 6 microseconds. The tweet included an image that depicted BSE as a leopard in the exchange’s trademark blue colour. It was followed at a distance by a snail, which sports the trademark colour of a rival exchange, leaving little to the imagination.

As far as cheekiness goes, the image scores well. But a look at fundamental metrics, such as turnover on its platform and net profit, show BSE is far from being in a position of strength. On the contrary, on the important profit count, not only has its growth decelerated, it has even reported declines in the past five years.

To start with, the claim about being the world’s fastest exchange itself is surprising. Less than six months ago, Ashish Chauhan, BSE’s CEO had told Press Trust of India that it currently has a response time of 200 microseconds, and that this is expected to improve to 20 microsecond in three years’ time. Deutsche Borse AG, the developer of the T7 trading platform that BSE uses, said in a presentation that it experiences median round-trip latency of around 60 microseconds. BSE did not respond to a list of queries Mint sent last Thursday.

In any case, going to town about only the median response time doesn’t mean anything. What actually matters is the round-trip latency for a client who is co-located. Besides, averages and medians don’t make much sense—what is important to know is the distribution in terms of percentiles, and what is the minimum and maximum latency experienced by co-located members under the new system. Besides, it is not clear if the results shared by BSE are based on test conditions or from a live environment. And, if so, how many messages per second are involved? So, while the uninformed cheered BSE’s latest announcement, experts in market microstructure are left scratching their heads.

With the adaption of T7, there is no doubt that BSE’s response has improved materially, but its latest statement sticks out like a sore thumb.

In any case, the bottomline is if BSE’s claims of being super-fast and hence super-attractive to large trading firms are resulting in increased volumes. Since early 2014, BSE has talked about being at least 10 times faster than rival National Stock Exchange; it said so even in a press release. The latter, without providing concrete data, has countered this, saying that it has a similar response time. But trading firms and vendors of trading platforms attest that there is a material difference in response time, ever since BSE adapted the T7 platform.

Yet, despite the apparent speed differential, BSE hasn’t been successful in garnering greater volumes. In the equity derivatives segment, for instance, BSE enjoyed a 33.8% market share of traded value between June and December 2014. In the first six months of this year, it fell to 12.7%, and has later fallen to 11.7%. In the currency derivatives segment, its market share rose from 34% in the June-December 2014 period to 45% in the first six months of the year, but has since fallen to 37.5%.

At best, it can be said that faster systems have helped its currency segment, but some of the largest and most sophisticated trading firms have stayed away from the exchange’s trading platforms. Foreign institutional investors have been all but absent. As on Monday, they did not have any open interest on BSE’s equity derivatives platform. Clearly, BSE’s super-fast trading platform hasn’t impressed some of the trading firms that matter.

BSE’s investors should be worried about the somewhat smug posture its management is taking. In the past five years, its standalone net profit has halved, from 212.9 crore in financial year 2009-10, to 101.44 crore in the last financial year. Consolidated net profit has fallen by a third during the same period to 155.5 crore, although this includes a number of other businesses. Standalone net profit at NSE has risen by 27% during the same period.

As pointed out in this column before, BSE cannot be faulted for not trying. Some policy mistakes such as the securities transaction tax (STT), for instance, hinders the ability to effectively compete. But for all its efforts, the results are lacking in core equity markets. In this backdrop, posturing, such as the one in the above-mentioned instance, can leave a bad taste in some quarters.

We welcome your comments at inthemoney@livemint.com

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