As India debates profit motives for market infrastructure institutions (MIIs) like stock exchanges vis-à-vis their larger role as protector to investors interests, Ruben Lee, CEO, Oxford Finance Group, suggests profit model for market infrastructure institutions leads to efficiency and helps easy raising of capital. In an interview with Dilasha Seth, he says competition among exchanges is very beneficial. Edited excerpts:
In India, there is a dilemma over whether MIIs must be allowed to be profit making entities and be themselves listed on the exchanges. What is your take on that?
I haven’t done work on India, but regarding the governance of MIIs, there is no silver bullet. There is no one single answer that is globally correct for MIIs. The for-profit model has a lot of strengths, it may lead to efficiency, it may mean you don’t need to only satisfy your members interest, you may satisfy wider markets, interest, meaning you could raise capital more easily.
The for-profit model has the advantages of being customer-centric. After all, that’s where for-profit institutions get their revenue. It has advantage of focusing on efficiency, of raising capital more easily than other alternatives and of not necessarily focusing on interests of members but shareholders. So, members may be a relatively restrictive group. But if it is a monopoly, then it may seek to maximise profits, exploit its position and act anti-competitively. That may be unappealing. The non-profit model has a benefit of not seeking to maximise profit normally.
But, will MIIs for profit not sacrifice their role as protectors of larger interests?
It is actually not clear as to whether a for-profit exchange that undertakes regulatory functions is fatally compromised because it will seek to maximise profit at the expense of its regulatory duty. Implicit in a criticism of for-profit institutions acting in favour of their shareholders and at the expense of public interest is a lack of understanding that the non-profit institute can also be similarly compromised. So, my view about such conflicts of interests is normally, it is better they be managed, than be eliminated. You have a code structure which is the representative of public, you have a separate committee, a conflicts committee.
What is the global experience?
It is worth noting that there are now many for-profit exchanges that operate in many jurisdictions. I have not seen evidence that these for-profit models are pursuing public interest any less powerfully than the alternatives.
Some new players are planning to enter the stock exchange segment (MCX-SX) and some old ones (BSE) are trying to gain market share. But these efforts seem to be against heavy odds, as they have little room for innovation in product or pricing, since Sebi regulates these parameters. How can a monopoly be broken in such an environment? Is competition between exchanges good or bad?
My view in general is that competition between exchanges is strongly beneficial. It does provide incentives to offer different sorts of trading systems, to lower your prices, to be more efficient. And, where we have seen, it is very beneficial.
The normal argument against it is that normal fragmentation arises; so, orders are split between different exchanges. And, because you split orders between different exchanges, the liquidity may decrease. In addition, it may be much harder to see what is going on. So, transparency may be compromised and market surveillance may be difficult.
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What is your assessment of the global markets?
The state of the global markets is poor and getting worse. The debt overhang in both Europe and the US is very problematic. I think nothing will be done about it in the US, until at least after the election, as it is too hot a political potato to deal with before the elections. Over there, the debt and the deficit overhang will be very difficult to deal with.
In Europe, we have had rioting on streets in Greece. It is biting, but hasn’t really start to bite. We have had enormous amounts of money being pushed into the system by the European Central Bank. The most immediate question is: Do we get a Greek default later, as it has been avoided so far? Even if we don’t get a Greek default, to what extent will that affect other weaker countries like Portugal, Italy or Spain? Also, will it affect the stronger countries? It would start biting much harder than it does today. Socially, people are going to be surprised by how tough it is.