MSCI Inc. was the first large institution to speak forcefully against Indian exchanges’ decision to put restrictions on use of their trade data. Its statement that exchanges should reconsider the move has caused a fair amount of antagonism, with some market participants saying that MSCI is overreacting.
But the index provider is only stating the obvious. When was the last time three producers got together and put out a statement saying they will put restrictions on competition? To make it worse, Indian exchanges have been justifying their stance saying, “We are only acting out of commercial interest."
Sure, producers can be expected to act in their own commercial interest and shut out competition. This is precisely why regulators and anti-competition watchdogs exist, so that they can step in and take corrective action.
Given a choice, incumbent telcos in India—Airtel, Vodafone and Idea—would love to come together and shut out new entrant Reliance Jio by not providing the latter points of interconnect (PoI). But because that is anti-competitive, the telecom regulator has come up with guidelines that PoIs must be provided within a specified time-frame. It has even recommended a hefty fine on the incumbents for not responding to PoI requests soon enough.
Sadly, the Securities and Exchange Board of India (Sebi) has been found parroting the exchanges’ version. Marti G. Subrahmanyam, Charles E. Merrill professor of finance and economics at the Stern School of Business at New York University, says, “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." Subrahmanyam’s views are elaborated in this interview.
Mark Austen, chief executive officer at Asia Securities Industry & Financial Markets Association (Asifma), says, “Institutional investors are saying the action of Indian exchanges gives the appearance of collusion and amounts to anti-competitive behaviour; and a lot of them find it troubling that the regulator is not doing anything about it." Asifma is a trade organisation for financial institutions.
Sebi should take a leaf out of the book of its counterpart in the US, the Securities and Exchange Commission. Just a little over a month ago, SEC allowed Cboe BZX Exchange to compete with Nasdaq and NYSE for market-on-close (MOC) orders. The two incumbents resisted the move citing that the exchange’s new product Cboe Market Close is free-riding on closing prices discovered on their platform.
The discussion at hand isn’t very different from what MSCI and some other institutions are raising. Can the data generated on one exchange be used to create products that are traded on another exchange?
SEC went through a thorough and prolonged consultation process before ruling in BZX’s favour. Its order states, “The Commission believes that while BZX would not be conducting the closing auction that would determine the execution price for orders executed in Cboe Market Close, the availability of Cboe Market Close will inject competition into the closing process to the ultimate benefit of market participants generally, which could include price and execution quality competition. The Commission further believes that implementation of Cboe Market Close could incentivise the primary listing exchanges to continue to innovate and compete to attract MOC orders to their closing auctions, which may include lowering transaction fees, to the benefit of market participants generally."
The US securities market regulator is rightly aware of the dangers of impeding competition as it ultimately hurts market participants. Apart from the pro-competition stance, another lesson for Sebi is the thorough process adopted by the SEC before arriving at its decision. As pointed out in this column, the abrupt decision on data restrictions has brought to the fore India’s seeming lack of capacity to make evidence-based decisions.
Subrahmanyam also says the move by Indian exchanges and the inaction by the regulator will hurt India’s interests in the long term. “India cannot aim to be the best in the world, while at the same time shutting off competition from elsewhere. It should measure up to world standards and compete," he says.
Shutting off independent index providers such as MSCI and overseas exchanges will, to use SEC’s words, disincentivize exchanges to innovate and compete.
Indian exchanges have argued that index providers haven’t been shut off, but that they have been merely asked to ensure their indices on Indian equities are not used for derivatives trading offshore. But this is disingenuous. MSCI doesn’t create indices for charity; putting restrictions on the use of the indices cuts off one of its revenue streams.
Also, while NSE may be right in saying that no one can force it to license its indices to an overseas exchange; what is left unsaid is that Indian exchanges are forcing other index providers to not license their indices to overseas exchanges. This is somewhat akin to the Microsoft antitrust issue involving its homegrown internet browser. NSE and the Indian exchanges are using their control of the Indian equities market to create a monopoly in the market for trading on Indian equity indices.
Subrahmanyam says, “It makes sense for an exchange to enforce a reasonable charge while disseminating data. But there is no argument for preventing access or putting unreasonable strictures on the use of the data."
This is precisely why the regulator should step in. While Sebi hasn’t covered itself in glory by its inaction thus far, the least it can do is to respond to MSCI and other critics after a thorough consultation.