What would Friedrich Hayek do with a large prominent business, trusted by the public, that is caught cheating that very public solely to enrich itself? And what if that same business illegally plotted to force its rivals out of business?
The Competition Commission of India (CCI) recently judged the National Stock Exchange (NSE) to have anti-competitively tried to monopolise the nation’s currency derivatives market. The CCI’s ruling follows from a complaint by the Multi Commodity Exchange-Stock Exchange (MCX-SX) alleging that the NSE set its transaction prices below costs – at zero – to drive competitors out of business and deter market entry. The CCI ordered a Rs 55.55-crore ($12.7 million) penalty on the NSE, and to cease and desist its unlawful practices.
The judgment rebukes the NSE’s business strategy and characterises its conduct as “a grave injustice to the economy, market … and ultimately the consumers”. The CCI found that the NSE violated the Competition Act with “a clear intention to eliminate competitors” by abusing its dominant position in the market. The NSE had waived all transaction charges, admission, data, and deposit fees, and also provided consumers proprietary trading software at no cost.
The NSE’s pricing strategy made it impossible for the MCX-SX to compete for customers and be profitable. Yet with extraordinary resolve, the MCX-SX leadership decided to match the NSE’s prices of zero, and sustain losses to date of at minimum Rs 150 crore ($33.7 million). Unlike the MCX-SX, which now trades only currency derivatives, the NSE offers a broad range of trading products so it could offset its losses and, slowly, drive the competition out of business. The NSE sought to eliminate its rivals and establish a monopoly position so it could later gouge consumers with exorbitant fees and recoup earlier losses.
The NSE’s conduct is a textbook example of predatory pricing and abuse of a dominant position. The NSE joins the lore of ignominy of giant companies that have violated antitrust laws in the face of rising competition. A century ago, the United States convicted John D Rockefeller’s Standard Oil Company for pricing at below cost to eliminate smaller rivals. A decade ago, regulators in the United States and European Union forced Microsoft to fundamentally alter its business practices, because the technology giant was leveraging its dominance of the operating system market to unlawfully monopolise software markets. In 2009, the European Union levied a record euro 1.06 billion ($1.5 billion or Rs 6,680 crore) fine against computer-chip maker Intel for its unfair pricing rebates that harmed the competitiveness of rivals.
India’s young CCI, established in 2003, demonstrated a sophisticated understanding of key antitrust principles. The CCI properly applied the relationship between market dominance and consumer harm, and drew upon antitrust precedent from the US Supreme Court, US Department of Justice, European Commission, UK Office of Fair Trading, Supreme Court of Canada, and numerous Indian and world academic treatises.
For the MCX-SX, this decision validates three years of uncertainty and perseverance. The MCX-SX is India’s youngest stock exchange and has struggled financially since its inception, solely as a result of the NSE’s illegal behaviour. Yet despite these hurdles, the Multi Commodity Exchange with MCX-SX has managed to become the ninth-largest derivatives exchange in the world, based on the total number of futures and options traded. According to latest data of a global Industry association, the MCX-SX dollar/rupee contract has emerged as the single most traded foreign exchange derivative contract worldwide.
The CCI’s ruling paves the way for the MCX-SX to charge fair market prices. The judgment ordered the NSE to begin charging appropriate fees, and this will permit competition to work to benefit Indian markets. The MCX-SX should and will seek civil damages from the NSE for actual and potential losses, likely amounting to several hundred crores of rupees (upwards of $70 million).
Going forward, the CCI’s judgment forces the NSE to compete based on the quality of its services, rather than the size of its coffers. And it verifies the stated objective of MCX-SX to bring “markets to the masses” to transform economies, and in Hayekian fashion, to empower the common man with price information.
The writer is chairman and CEO of Financial Markets International, Inc, a Washington, DC-based law and economics consulting firm