The National Stock Exchange’s (NSE’s) cash market trading systems were shut for more than three hours on Monday due to a technical glitch. When the bourse resumed trading, broker members claimed things weren’t entirely smooth.
The timing of it all could not have been worse. NSE is already being investigated by market regulator Securities and Exchange Board of India (Sebi) over allegations that it provided some trading members preferential access to its trading systems.
So even though exchanges across the globe have had outages owing to technical glitches, given the backdrop, it’s all the more important for NSE to publish a clear report of what exactly went wrong. Click here for a list of trading halts owing to software/technical glitches.
In one such case, the Monetary Authority of Singapore even imposed a stricture on Singapore Exchange of a moratorium on trading fee hikes until it improved the quality of its trading systems. Of course, that was after recurring trading related issues at the bourse.
Depending on what the study of NSE’s problem reveals, there may be a case to impose strict quality of services standards from Indian exchanges as well. After all, this isn’t the first instance of technical troubles Indian bourses have had—in the past, BSE has faced problems with its trading systems as well.
Interestingly, NSE’s Monday blues put the spotlight on rival BSE, which enjoyed a monopoly on cash market trading for a majority of the day’s trading session. Still, BSE ended the day with a turnover of less than Rs10,000 crore, or less than half of NSE’s average daily turnover in the cash market segment. NSE, on the other hand, managed a turnover of over Rs6,200 crore, which is about 1.8 times BSE’s average turnover. And while NSE’s equity derivatives segment was shut for parts of the day, all BSE could manage during the times was Rs25 crore in turnover.
This just brings to focus the lack of competition for NSE, especially in the equity derivatives segment. While some cash market volume shifted to BSE, even there, it was evident that hardly as many market participants are connected to it as they are to NSE.
We have argued earlier that the regulator should facilitate and encourage competition among exchanges, by relaxing its stringent ownership norms. Thanks to restrictions on who can own shares in stock exchanges, and also because of a low limit on ownership, there is practically no scope for new bourses and competition to emerge. Besides, the securities transaction tax acts as a safeguard against competition for dominant exchanges such as NSE.
Even if a new entrant were to waive transaction fees completely to attract volumes, it may not succeed. To attract participants on its platform, it will have to provide a rebate that covers the transaction tax.
In sum, because exchanges perform the role of a quasi public utility, its problems are not its own. Policymakers must take keen interest in ensuring quality of service as well as dealing with frictions that inhibit competition.