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'Competition among exchanges pushing transaction cost to zero'

Lawrence Leibowitz, the chief operating officer of NYSE Euronext spoke to Palak Shah on their India plans and race among global exchanges

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The NYSE Euronext, one of world's largest stock exchange, has been watching India scenario closely. They sold 5% stake in National Stock Exchange (NSE) in 2010 as the latter tied-up with rival Chicago Mercantile Exchange in US. Lawrence Leibowitz, the chief operating officer of spoke to Palak Shah on their and race among global exchanges.

Indian are among fastest growing globally. Your decision to exit NSE was right? The share price of rally's every time you come to India.

NSE's move to tie-up with CME was partly the reason why we had to exit the exchange. In medium term, it limited scope of operations that we could do together. It became difficult to access what strategic value we could draw with NSE as we were not looking at it only as financial investment. The markets had also cooled down. NSE is a strong competitor, it has got better technology in India and leadership position. The MCX group is hopping to rival them with MCX SX and they are strong competitors themselves with track record. Obviously, NSE has done a good job of encroaching Bombay Stock Exchange's (BSE) space but MCX SX is a different animal. It would be interesting to see how competition plays out. The 5% position that other exchanges and players have in Indian exchanges is very small. We were made to believe, the ceiling would be raised but it did not happen. In future, if it is raised, we would re-consider investing.

Exchange ownership is not only way for long term relationship. We are spending lot of time on building technology relationship here with exchanges, including that on order flow and seeking strategic partnership for cross listings on derivatives.

What is your view on BSE? The new Sebi regulations give a fair chance to compete?

It is not about fair chance. Competition does not wait. To compete today, technology has to be good enough and exchange management should take steps that makes them competitive. Some regulations do not make sense and are cumbersome. Regulator should allow players to build exchange that can compete globally. We have some similar regulations in US like separate regulatory and business arm, which may be good. Market share of BSE still needs to stabilise, it is not in good position. When we were partners with NSE, I can say of that time, they had done a good job of upgrading systems and supporting more electronic trading. They are offering everything that technology regulations allow in terms of direct market access, smart order routing, cross margining, high frequency trading and so on... all this is part of technology that every modern exchange should have. Trading practices that take advantage of speed are relatively new in India, they will mature as regulator allows more activity.

There is lull in activity among exchanges globally. Consolidation and alliances are not working out? Your strategy?

Consolidation has proved difficult due to regulatory and national interest clash. Singapore and Australia was an example. London Exchange and TMX deal was another. The NYSE Euronext and Deutsche Borse was more due to competitive reasons. Exchange alliances are not proved fruitful either. We are in a business of scale, consolidation among exchanges has to pick up again when climate changes. Till then, we want to develop partnership for new products, do our best to develop technology link-ups for easy order flows around the world.

Right now it doesn’t look like speed will be the only important thing in this particular part of cycle, probably because there isn't a lot of trading activity. Currently of you make order flow easy globally, micro seconds don't really matter as much. Speed is inherent between exchanges and clients anyways. So it a balance to have better connectivity around the world and enable small exchanges to have good technology to play in that game.

Are you underplaying importance of speed as it has led to market chaos recently?

First, I don't think speed is causing chaos in the market. Regulators need to show they can do better surveillance and convince people that modern trading practices are not bad. Second, I think more alliance on technology are required from exchanges and brokers to improve their quality. Complicated market structure will require complicated technology. This means any break down in the chain can cause problem. Markets have seen technology advancements for 30 years. It is only now that press makes every problem, like a network router break down in Tokio, to appear big. The more we rely on technology, it is our responsibility to ensure it works. But not all things are in our control, even as exchanges. It is all pieces in the  puzzle -- the brokers, exchanges, vendors. And regulators can't quite know how to manage this world.

There are no check and balances for modern trading technology? It is causing billions of dollars of loss. How big is tech solutions business for exchanges?

No matter what we do, we will have tech breakdown. We must ensure they happen less often. US has not seen billions of dollars of loss. In Facebook case, problem was not just technology, but also exchange management. It is important how you react to tech problem. When it breaks, people must see it recovers well. Like modern cars. You open the hood, its all computers now operating every other thing in car. When struck with problem at 60 miles an hour, people in car will have to handle it. They should know their job. So you got multiple lines in here too. Develop systems efficiently, react well during breakdowns or control with things like circuit breakers. Flash crash will never happen again due to circuit breakers. So it is as much a people problem as technology. In US, we are looking at all aspects and there are good regulations on technology surrounding dark pools and brokers. There will be more specific regulations going ahead.

Allowing competition without barriers will push transaction cost to zero. It is happening in US. After competition came in, share of transaction revenue has gone down as a percentage of total revenue. So exchanges are going behind tech revenue and it is a big source. Not every exchange will be tech provider, they can't afford it. Four, five exchanges will be real tech providers to the world. It would be important part of their revenue. Now, exchanges will get revenue only on segments where they can add value. Exchanges are tech solution providers not only to other exchanges but even brokers and institutions.

Are exchanges banking on market to come on their platform?

It will take lot of time. Brokers and bankers, who control this trillion dollar market globally, re not letting it happen. Key feature of OTC Market is understanding counter party risk. Very few people knew AIG was largest issuer of derivatives in the world in 2006. That shows there was no centrally reported clearing arrangement for OTC derivatives. Even the regulators and clearing houses are not geared up for this.

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