Where are the volumes? That’s almost the only question most ask when you talk about the Bombay Stock Exchange (BSE). Madhu Kannan, managing director and chief executive officer of BSE, who completed two years on the job today, talks on this with Palak Shah. Edited excerpts:
There is a perception that nothing has changed at BSE, as trading volumes are not improving.
Before the new management took over, BSE suffered major credibility and confidence crises due to legacy issues. This required time to fix. The first thing was to put a strong governance structure in place. You cannot project BSE as a standalone trading platform. To be in line with global players, we had to consolidate our business and project the exchange as an end-to-end solution provider.
Today, BSE has greater control over its depository, technology and a strong web-based distribution network. Technology was strengthened through acquisition of Market Place Technologies. We brought a turnaround in the clearing and settlement business by setting up Indian Clearing Corporation, a 100 per cent subsidiary. In the currency segment, we have a 15-20 per cent market share from zero, through another subsidiary, United Stock Exchange. Our IPO market share has improved significantly. More than 75 per cent of companies listing in India select BSE as the designated exchange, due to its service-oriented approach. Even in new areas such as mutual fund distribution through stock exchanges, we have a dominating market share now.
In the first phase of BSE's re-structuring, we designed a framework to ensure BSE has a meaningful business structure and the gaps are filled. Those who understand the exchange business have shown confidence in BSE in these two years. This is evident from some of the world’s largest investors, including George Soros, Thomas Caldwell and private equity player Argonaut showing interest in picking up stake in BSE. Some two years ago, BSE shares were trading at around Rs 180 a piece. Their value doubled after we started making changes and put a proper road map in place. The first phase of BSE's turnaround is over. The second phase will see a higher rate of execution. Training, index data and listings are other revenue streams, making up for some loss in volumes.
But the core, equity cash and derivative segment is going nowhere?
This is a wrong notion. Both cash and derivative volumes will pick up on BSE in the second phase of revival, once market making schemes are approved by the regulator. Equity volumes have declined globally in recent months. In the US, derivative volumes are down nearly 30 per cent on the New York Stock Exchange and cash volumes are down over five per cent. It is a similar case in Europe. Liquidity has shifted to other asset classes but it is a temporary phenomenon.
Currently, product innovation is the focus. SOR, cross-exchange algorithm which will bring inter-exchange operatability, physical settlement in derivatives, change in expiry of the derivative segment, call auction market mechanism, increase in trading hours are all results of BSE’s initiatives. Innovative market making schemes like the maker-taker pricing, payment for order flow and other such schemes are waiting regulatory approval. More, we brought both cash and derivative on a single screen, launched a software similar to NSE’s (National Stock Exchange’s) NOW and an advanced version is being worked out. The software is easier and cheaper for brokers to connect. We initiated mobile trading and cut membership fees in both equity and debt segments. The NSE had almost 40 per cent more active members than BSE and the gap was increasing by at least 10 per cent every year. However, during our drive, around 230 out of 400 new membership applications are from existing NSE members. About 1,100 other members have shown interest.
Debt volumes are showing signs of picking up. Over 50,000 quotes are now available on the BSE derivatives screen. It is yet to culminate into more volumes but the scenario will change significantly in the next year or two. Sensex futures are also available to be traded in Europe but volumes will pick up once there is action in the index in the domestic market. Meanwhile, the efforts have resulted in more order flows on the exchange.
The only major issue is that we have faced great delays in getting approval for some of our products. For instance, SOR and cross-exchange algo took over a year for approval and now we are waiting for market making schemes. There are still some restrictions on cross-exchange algo trading and its easing will bring more volumes on BSE. Members still have to take prior permission from NSE if trades are routed from their co-location. I hope this (easing) is not delayed. In some cases, vendors, too, are not allowing algo trades from NSE to be routed on BSE. It has to stop. Inter-exchange operatablity is the key for any liquid market. We believe regulatory, technological, distribution-related, innovative (product, processes and technology) and competitive issues will dominate the next decade in the Indian capital markets and our strategy covers all this.
Is the exodus of people from BSE a concern? Is the listing plan of the exchange still on?
The churn ratio in the industry is very low and people churning is always very healthy. The exit of Jim Shaperio and Eric Czervionke has been blown out of proportion. They had come to help BSE in its first phase of turnaround, which has been achieved. Both the BSE board and management have attracted great talent in these past two years. Recently, Alay Desai from Morgan Stanley and Girish Joshi from ICICI Treasury have joined BSE to help the exchange in the second phase. A complete turnaround requires some passion, perseverance and patience. I’ll stay with BSE till a turnaround is achieved. There is a lot of confusion around the Jalan report. Globally, top exchanges are listed and it brings in more transparency. Also, companies are more confident to list on your exchange once there is trust. Once listed, BSE will attract more leading investors.