The war of the exchanges

The war of the exchanges

The battle between the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) is hotting up. This is good news for users of their services for the same reason that competition is good for consumers of any good or service: Costs drop and choice increases.

Stock exchanges in most countries have traditionally been either monopolies or oligopolies because of network effects: A highly liquid market attracts more investors who make it even more liquid. India is one of the few countries where a new exchange has actually displaced an established leader, which NSE did because of its superior infrastructure and risk management. Even as NSE won over investors, a brokers’ cabal that lived in denial ran BSE.

This is only the beginning. The Singapore exchange already hosts a strong market for Indian index futures. New exchanges are being set up. And in the future there is the possibility that some trading could shift to online exchanges and the so-called dark pools of liquidity, that allow traders to buy and sell large amounts of stock or other financial assets without letting the public markets know.

But even as we welcome the heightened competition between the main stock exchanges, the regulators must keep an eye out for anti-competitive behaviour. A Page 1 story in Mint on Thursday mentioned how BSE believes that NSE is trying to block programme traders—who use algorithms to take decisions —from accessing trades on BSE. Most large stocks are listed on both exchanges and such a move could lead to trading inefficiencies. NSE denies the charge.

Such complaints are likely to climb in the months ahead as the war between exchanges intensifies. A Mint column on 14 December pointed out that it is unclear who should bell the cat—the Securities and Exchange Board of India or the Competition Commission of India.

Competition does the job of disciplining players better than regulation does in most cases. But stock exchanges are akin to public utilities and need regulatory oversight. The two regulators may have to work together to ensure that the Indian stock markets are not hobbled by anti-competitive behaviour.

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