Bse Vs Nse

The National Stock Exchange has consistently overtaken Bombay Stock Exchange in terms of trading volumes in actively traded shares.

What does this mean for the investor?

These days M G Damani, president of Bombay Stock Exchange (BSE), is a busy man. He has been travelling across the country visiting officials of various stock exchanges. His motive: to expand the BSE On-Line Trading (BOLT), across the country, which in turn, will help expand the market capitalisation of small- and medium-cap stocks.

Damani has reason to be worried. The BSE has been steadily losing much of its tradin business to the National Stock Exchange.

 

Our comparative study of trading volumes and number of trades on both exchanges shows that NSE is ahead on stocks that accounted for 96.9 per cent of volumes in 1997.

The investor has equal reason to be concerned . Which exchange should he place his orders? Which exchange will earn him better spreads?

Before we answer these questions, a caveat. The number of scrips traded on the BSE and NSE vary. The number of listed stocks on the BSE is approximately 6,000 of which about 1,600 are actively traded while the number is 1,800 and 800 respectively for the NSE. However, the impact of this on our analysis is relatively insignificant because the number of stocks traded on the BSE but not on the NSE account for only a tiny portion of trading volumes.

Trading volumes and number of trades

A comparison on the basis of trading volume or the number of trades shows that the NSE fares better on basis of the latter parameter(see table: Tug of War). This indicates that the NSE market is more active, and is clearly used by more retail investors. In contrast, BSE seems to be better entrenched in terms of obtaining orders from the large institutions (in Mumbai), hence the average trade size at BSE is much larger even though the number of trades is much smaller.

In fact, the NSE gets around 70 per cent of its total business from the retail trade and the balance from institutional trade. It covers more than 161 cities. On the other hand, BSE gets 80 per cent from institutions and covers 98 cities.

(This, incidentally, contradicts the common perception that professionally managed institutions would favour NSE owing to its transparency and reliability. However, the relationships established by the BSE brokers over decades at the dealing rooms of institutions seem to have held their own despite stiff competition.)

The NSE has also fared better on the basis of trading volumes (see table: Vital Statistics). Of the total traded volumes in the market (BSE plus NSE) in the past

12 months, the share of NSE has increased from 62.81 per cent in January 1997 to 66.92 per cent in December 1997. On the other hand, BSE's share has declined from 37.19 per cent to 33.08 per cent in December 1997.

The NSE has also fared better on basis of delivery. Here again, we have taken the total delivery in the market (NSE plus BSE) and the per cent share of each exchange has been worked out. Of the total deliveries in the market, NSE accounted for more than 78 per cent in January 1997 which has declined to around 71 per cent in December. BSE, on the other hand, accounted for a mere 22 per cent in January 1997. Although this improved to 21 per cent in December 1997, the BSE still trails way behind the NSE on this score.

Winner and loser

When a particular exchange corners a majority trading volume in a particular stock, it is said to have a majority market share in that. Let us assume that the BSE and the NSE are the only significant stock market players and use trading volumes for determining market share.

We have studied the total trading volume (the sum of BSE and NSE) of those stocks where NSE is ahead versus the total trading volume of those stocks where the BSE is ahead. Based on data for the twelve months of 1997, the lowest--ever showing by NSE was in March 1997, where stocks where NSE was ahead accounted for as much as 90.5 per cent of the volume.

If we add up the volume over 1997 as a whole, NSE was ahead on stocks which accounted for 96.9 per cent of the volume. Thus, the NSE has a giant market share in spite of having fewer number of stocks (see table: Tug of War).

In the last quarter of 1997 (October-December), there have been major expectations of enhanced business at BSE owing to the reintroduction of badla and the VSAT terminals that have been installed outside Bombay.

Over this period, we find that NSE won the majority of volume on securities which accounted for 97.2 per cent of total business. This suggests that badla or BOLT expansion have not yet been able to have a major impact upon BSE's ability to obtain leadership on many stocks.So which exchange is better for the investor? The answer centres on transaction costs, which comprise three components: brokerage fees, market impact cost and clearing and settlement costs.

The brokerage fees of BSE terminals outside Mumbai are around 0.5 per cent, while brokerage fees on NSE are around 0.1 per cent of the value transacted. NSE is said to have a very good reputation for efficient and reliable clearing and settlement. When we look at volumes on the two exchanges, we might get some idea about the differences in market impact cost. The data suggests that in the last quarter of 1997, NSE was more liquid for the 835 stocks which accounted for 97.2 per cent of total trading volume. BSE was more liquid for the remaining 430 stocks which accounted for just 2.8 per cent of volume. Going by the number of trades, which reflects the usage of retail investors, NSE was ahead on 938 stocks.

We look at the 100 largest companies by market capitalisation. Here we have shifted the focus on market capitalisation, instead of trading volume, as the needs of many investors mirror size and not volume. We are also careful to avoid selected lists like the NSE-50 index, since the NSE-50 index is optimised and weighted for liquidity on NSE. The data pertains for May 30, 1997, which is the mid-point and thus avoids us from year end trading cycles.

The 100 stocks are sorted by NSE's market share(see table: Where to invest). We see that NSE's market share ranges from extremely high levels (like 75 per cent for ACC) to a position of parity with BSE (like 50.02 per cent for NALCO). It trails BSE only in some stocks (12.2% for SCI, for example).

In this table, NSE is the more liquid market for 71 stocks. If brokerage fees and costs of clearing/settlement were equal on both exchanges, then investors might be better off placing orders at NSE for these 71 stocks. For the remaining stocks, where BSE is the more liquid market, orders should be sent to BSE, as long as the brokerage fees and clearing/settlement costs match those of the NSE.