Some years ago, I posited the concept of “micro exchange”. Essentially, the “classic” exchange had been a monolith beholden to a previous era of technology. Nowadays with modern information technology (IT), it is possible to set up tiny exchanges with a handful of staff to create a marketplace in any field. The key here is to be able to deploy relatively cheap network technology (often created in India) and then build an exchange that may only be of interest to a tiny niche marketplace. Therefore, the micro exchange is a small yet beautiful object that can provide all the usual benefits of an exchange — price transparency hedging, risk transfer and, of course, the opportunity to invest in a particular market.
Software developed in India has powered the micro exchanges run by Comdaq the world over — for example, Nepal Stock Exchange. Therefore, it is ironic that under the Bimal Jalan committee, the new prescriptive regulatory concepts for ownership and management of exchanges will deny India the opportunity to use this concept. That seems strange given that in other parts of the world, such as in the European Union, it is now possible for anybody to establish an exchange. Capital requirements are frequently a million dollars or less and regulators welcome the opportunity to have new platforms in their jurisdiction. This practice is the opposite of the reactionary concepts laid out in the Jalan report. A great deal of India’s growing prosperity can be attributed to small companies growing into large enterprises.
Yet, when it comes to being an exchange owner, the message for India is that entrepreneurs must choose to go overseas. This will neither help India’s developing financial markets nor the nation’s desire to create at least one major financial centre. The dynamism of great financial centres like London and New York has been driven by entrepreneurial ability to assess new markets and products, along with a constant belief that Schumpeterian creative destruction works. London remains a great, if not the leading, global financial centre despite the relative drop in British prosperity in recent times. The fact is that encouraging new markets and allowing any “fit and proper” person to create a new exchange infuses dynamism in exchanges.
All major new markets of the past 50 years have been derided by sceptics. Yet, powerhouse businesses such as Intercontinental Exchange, the International Securities Exchange and the National Stock Exchange have all been created from absolutely nothing in the past two decades to become billion dollar businesses. In a nation as broad and diverse as India with such a considerable population, it is wrong to prescribe that only very large and well-capitalised collectives can set up an exchange. There is great potential for small and regional markets that can add significant value to the economy. Exchanges ought to be encouraged and suitably regulated. As things stand, India is stipulating that its IT industry can continue to be the core resource-exporting technology for foreign markets, while Indian investors will never be allowed the flexibility of dealing in such markets since they cannot establish themselves in India owing to capital and ownership restrictions.
Patrick L Young, Founder and Chairman, Derivatives Vision, on email