BSE plans commodity derivatives push, raises concerns over SOR delays

BSE MD Sundararaman Ramamurthy said delayed smart order routing approvals are hurting market share growth as the exchange explores commodity derivatives

Stock exchange BSE plans to explore commodity derivatives at the earliest, the exchange’s managing director and chief executive officer (MD and CEO) Sundararaman Ramamurthy said on Thursday during an after-earnings call. However, Ramamurthy stressed the need for a “unique selling proposition” and discussions with the regulator before entering the segment.

 

“BSE’s stipulated strategy is to explore commodity derivatives as early as possible. BSE was unable to gain traction in equity derivatives, with very poor volumes in equities for a long time. Over the past three years, our entire focus has been on creating a level playing field to the extent possible through regulatory requests and advocacy. Though there is still a long way to go, we will now begin thinking about commodity derivatives,” said Ramamurthy.

 

The comments come as the National Stock Exchange (NSE) has expanded its commodity basket, including electricity futures, 10-gram gold futures, and several other products in the pipeline.

 

While the BSE MD and CEO clarified that there would be no immediate launches, he said, “Some thought processes are underway and our sincere wish is that very soon we should be able to come out with consolidated views, engage with the regulators, and take the commodity agenda forward.”

 

On market share in the equity segment, he highlighted that while several measures, such as common contract notes, have helped improve market share, certain challenges remain. BSE’s share in equities hovers around 7 per cent to 8 per cent, while the exchange hopes to push it into double digits. “The applications for Smart Order Routing (SOR) are still pending for more than six months at the other exchange, while we have cleared ours. Because of this, SOR has not taken off and clients are unable to remain exchange-agnostic and access the best available price. This is probably impeding the growth in BSE’s market share, capital generation, and India’s economic development,” said Ramamurthy.

 

SOR refers to a facility that automatically directs trade orders to the most favourable venue based on price and liquidity. Stockbrokers must apply separately to each stock exchange separately for approval. The exchange added that it is working to attract traders targeting longer-term strategies. “The premium-to-notional ratio of Sensex vis-à-vis comparable indices in the market is lower. This is mainly because monthly contracts have yet to develop and grow significantly at BSE. Earlier, the ratio used to be small because most volumes were concentrated only on expiry day, when expiry was on Friday. Compared to that, today the concentration of volumes on expiry day has fallen significantly and volumes are now more evenly distributed,” he said.

 

BSE is also targeting more than 800 foreign portfolio investors (FPIs) amid rising volumes and liquidity. Over the past year, the number of FPIs on BSE has increased from 100 to 520. These include high-frequency traders (HFTs). “In terms of the big known HFTs, most of them are already there. It is these kinds of larger funds with longer-term positions that we are looking to attract. These are the areas where we expect growth,” he added.

 

The management also said it is strengthening efforts to expand colocation racks and is eyeing space in Mumbai’s financial hub, Bandra Kurla Complex.