BSE’s attempts to grow its market share in equity derivatives have begun yielding fruit. Are you planning to replicate the success in the cash segment?
There are challenges in the cash segment that we are trying to address. In respect of retail, many of the brokers are yet to provide for intraday operability on their front-end trading software, despite the regulator permitting the same. By intraday interoperability, an investor can, say, buy a share on NSE (National Stock Exchange of India Ltd) and sell it on BSE with the margin being netted off, thanks to a single clearing corporation, which nets off the risk, with the benefit of this being accrued by the clearing member. This benefit is not passed on to retail, as many brokers don’t provide for this kind of trading on their front-end software. We are meeting with several brokers and requesting them to facilitate this for the benefit of the retail investor. Some of them have changed it, and some are in the process of doing so.
Apart from this, we also revised the tick size to 1 paise from 5 paise in stocks with a price of less than ₹100 apiece, based on our experience with securities below ₹15. That began yielding results. The market share in these securities has risen to 12% from 9%. We had around five to 5.5% market share in equity cash in January, and this is beginning to look up.
At the beginning of the year, when I took over, whatever volumes we had in equity derivatives were on account of the liquidity enhancement scheme, which was not very helpful in building sustainable volumes in the segment. In currency futures, we were doing reasonable volumes, though not so in currency options. These are the main segments, generally the breadwinners. However, this in no way undermines our resolve to gain traction in the cash segment.
Today, in India, equity derivatives are a very big part of the ecosystem, and we started by focusing there, as that provides stability to the market. We have provided a product, Sensex 30 options, and withdrawn the liquidity enhancements scheme, which may appear counterintuitive but has begun bearing fruit. An innovative product attracts participants like high-frequency or algorithmic traders who set up servers in an exchange’s co-location premises. This is like an ecosystem that can be used across segments like equity cash and equity derivatives.
Have you been successful in getting institutional investors to trade on BSE?
With regard to mutual funds, just 4% of their volumes accrue to BSE. They say they don’t place orders because of a lack of sufficient liquidity, but our argument is that they are not here to place market orders. They place limit price orders that get executed during the day within the price limit set by them. The reason for a limit order is that the fund’s decision on what price and quantity to sell is not by an individual but by a committee. With a limit price order, there should be no worry about the liquidity at that point in time, but whether the order at that price and quantity will be executed during the day. So, we have been telling them to actually place the limit order and that will attract liquidity. We still have to achieve a large part of success on this front.
India is a large country and needs at least two vibrant exchanges to avoid concentration risk. In the event of a concentration risk-related event, we should have a viable alternative available for any situation. One exchange, along with another one doing well, brings in interplay between exchanges — they complement each other. They will, for instance, attract high-frequency traders who have active and passive strategies through algos (algorithms) by which retail gets the best price.
How does retail benefit from the entry of algo traders?
When more and more liquidity is generated on both exchanges, the bid-ask spread narrows, which benefits retail, which can enter and exit at competitive prices, and this, in turn, reduces the impact cost. Finer price and ease of execution lend stability to the market because there is a counterparty to absorb sharp price moves—when there is news, the price begins to move fast but stabilizes quickly when there is interplay between exchanges. Institutions have a responsibility to ensure that the objective of having two vibrant exchanges is met for the country as they are dealing with public retail money. The retailer should get the best price, and this will happen if you have two exchanges which complement each other.
It’s not that one exchange doing well now will take away market share from the other exchange. Actually, both exchanges will grow together. This is what we have been telling the institutions, but maybe we have to evangelize more.
What about foreign institutional participation? Is that a hurdle?
In respect of foreign participants, there are more restrictions (than with mutual funds). When an FPI places an order, there is a trading member, a custodian, who also sometimes acts as a bank, a clearing member and a clearing corporation. There is a confirmation process across all these stakeholders. The person placing an order is a fund manager who sits elsewhere and expects confirmation from the trading member who routes the same to the exchange. FPIs are honestly not bothered at which exchange their order gets placed. What they are bothered about is a single price for a single order, called the volume-weighted average price (VWAP). The broker can trade on multiple exchanges, but what the FPI wants is the best price, smart order routing and a single contract with a single VWAP. Today, while the contract note can be combined, that doesn’t address the single VWAP issue. The electronic contract note doesn’t provide for a single VWAP. That change is required. We have been working with everybody who is involved in this as a stakeholder. We hope this will be addressed. Then, we will have to work with the brokers to tell them there are avenues to get the best price for your client instead of only going to a single exchange and placing orders, thus avoiding concentration risk.
How difficult was getting participants to trade in the derivatives segment?
When we started in mid-May, only two software vendors were supporting BSE on their front end. Today, more than 13 are supporting—that is, display the Sensex 30 options for clients to see. Their front-end software has Sensex derivatives along with other products from other exchanges. BSE, in the past, thought that if they mimic Nifty, they will succeed. So, they came up with Sensex 50 derivatives. The market’s complaint was they couldn’t relate to Sensex 50. From time immemorial, they were attuned to Sensex 30. What I don’t relate to, I don’t trade. We consulted 300-plus brokers and addressed the problem by introducing Sensex 30 contracts. Since they had suggested this, and we implemented it, they have begun to actively participate in this product. They, in turn, went to the software vendor and asked them to provide Sensex contracts on their front-end software. That’s how we got broker support for the new product. Then algo players came in, the ecosystem has been created, and they will now start looking at equity cash, we hope.
Has the rise in market share across equities derivatives and cash been at the cost of the rival exchange?
We feel we are moving in the right direction, and the market share has been increasing. And true to what we stated, Sensex 30 derivatives haven’t affected anybody’s market share. Our volumes are rising, and so are those at other exchanges. In the same way, BSE’s market share in cash is looking up, though not at the cost of any other exchange. Two vibrant exchanges totally complement each other. We feel our efforts of talking to local institutions and FPIs should continue so that a single VWAP is indeed provided and that once the equities derivatives segment stabilizes, people will start looking at the cash segment and BSE becomes truly vibrant, where participants can enter and exit with ease.
Do you see the regulator being more sensitive in your aim for vibrancy or for creating a level-playing field?
Regulators always want a level playing field—the multi-MII (market infrastructure institution) set-up in the country is a regulatory stand—there should be at least two exchanges, two depositories, and two clearing corporations. The regulators are very supportive of the fact that the country should not face concentration risk or cyber risk in any fashion; rather, risks should be distributed, and there should be a level playing field. We are talking about a $5 trillion economy and then $33 trillion at a later stage. When the market grows, the disposable income in the hands of people increases. With around 60% of the population of income-earning age, the number of investors entering the market has increased; BSE has 140 million investors, with 90 million of these entering from 2020 through now.
Eighty percent of these 90 million new investors are below 40 years. When youth come in, they need to be guided to invest in, say, mutual funds, in the cash market and, to some extent, in derivatives, as that provides stability. For which you need multiple vibrant exchanges.