BSE to take on rivals in commodity derivatives with lowest transaction fee

Exchange leaning heavily on superior technology to make a dent in the segment before universal exchange becomes a reality

With the country’s oldest stock exchange, the Bombay Stock Exchange, starting mock trading in commodities derivatives for the first time on Monday morning, ripples are set to go around the commodity derivatives industry. This isn't only because one stock exchange is well prepared to launch commodity derivatives, but also because it plans to offer the lowest transaction charge payable by broker-members to the exchange -- one rupee per trade, irrespective of the contract value. 

While mock trading opened at 10 a.m. on Monday, when other commodity derivative exchanges had started trading, there was no change in the prices on the BSE platform as it was like a trial-run. The BSE brass also believes most members will dabble in gold futures, the first product it plans to launch when Sebi allows trading. The earliest this happen is October 2018, after equity market hours. 

The mock trading session will also help the exchange figure out if it wants to extend the timings in other segments in future. Commodity derivatives remain open till 11 p.m. 

Speaking to Business Standard, Ashish Chauhan, MD & CEO, BSE, said, “We will offer one rupee per trade as transaction charge payable by members to the exchange and that will be on a per-trade basis, irrespective of the amount of the trade. We offer such charges in other segment as well.” 

BSE has been putting commodity derivatives in place for the past two years, and had also appointed a CEO for the segment quite some time back. 

The exchange has also started gaining ground and increasing market share the past one month, after it restructured transaction charges in currency derivatives. It has used its technological advancement to improve its mutual fund services, and introduced an e-mandate on BSE StAR MF platform last Monday. This is a mechanism that digitises the entire mandate registration process by doing away with physical mandates. It is particularly useful in the case of systematic investment plans (SIPs), which take a few weeks when mandate is given in physical form.  

“Currently, there are 32 banks offering e-mandate services through National Payment Council of India (NPCI) and four banks are at the certification stage,” Chauhan explained. Over 550 e-mandates have already been registered under the new facility. 

Chauhan claims BSE's technological edge can be extended to commodity derivatives as well. The exchange uses the fastest technology, T-7, acquired from its partner Deutsche Borse. Since T-7 is open source, it is cheaper. Unlike other exchanges, BSE’s technology is not linked with volumes and is also more economical for the exchange to maintain. Response time is as low as six micro seconds, allowing the exchange to execute a staggering 30 million orders a minute. This kind of speed helps both market makers and algo traders, improving liquidity in the process. 

Options require faster technology as well, as there are put and call options, one for the at-the-money series (hovering around the index) and two each for out-of-money and in-the-money series for both call and put as minimum series. As the price moves, more series are added, which is why, the faster the technology, the greater the liquidity and order execution speed. 

Explaining its strength, the BSE MD said, “All banks’ subsidiaries that are members of BSE will be able to do broking in commodity derivatives and won't have to take a separate membership like all other BSE brokers. Even for new members, BSE’s membership fee is Rs one million (Rs 10 lakh).” However real-time risk management and managing collateral are already happening on BSE’s India International Exchange (INX). 

”Those who are engaged in market making in other segments, including commodities, on other exchanges will find it cheaper to do so on BSE’s commodity derivatives once actual trading starts.” 

The most important aspect is BSE's Investor Protection Fund (IPF), Chauhan claims. “We have an IPF of around Rs 7.5 billion (Rs 700 crore). At present we provide Rs 1.5 million (Rs 15 lakh) to investors from this fund, which makes it easier for investors to participate in commodities using BSE’s platform.”