NDS sounds death knell for bond houses

Introduction of the negotiated dealing system (NDS) has rung the death knell for about 50 per cent of the debt brokerage houses in India. Till August, 18-20 debt brokerages were in operation. Today, only nine brokerages are left working.

With the Reserve Bank of India (RBI) setting up the NDS platform, trade has been shifted from the traditional brokers to a screen-based anonymous activity. The earlier system involved usage of telephonic trading, via intermediaries.

Although participants in the debt market welcomed the move, the new system has badly hit the volume of every broking house's business. On an average, the domestic government securities market generates trading worth Rs 2,00,000 crore of gilts a year. The daily trading volume has come down following the ushering in of the NDS.

About 70 per cent of the trading in government securities takes place on the NDS system without any involvement of brokers. Consequently, the g-sec investors, who had to shell out hefty brokerage costs while trading telephonically, have made sizeable savings.

Moreover, since the time the NDS was put in place there has been a significant dip in the amount paid to the brokers who are still acting as intermediaries for a small segment of telephonic trading.

For example, initially, bond investors paid a sum of Rs 2,500 for every Rs 5 crore deal transacted. However, the amount was brought down to Rs 1,500 after the introduction of the electronic system.

While many brokerage firms decided to shut their shops, others took the equity route to reinstate their presence. The latter include Strategic Capital, IDBI Capital and the Securities Trading Corporation of India.

Sources pointed out that the global trend is that brokerage houses own the automated system, but India is an exception where the banking regulator itself owns the NDS.

Even as government securities are regulated by the RBI, brokerage houses come under the regulatory purview of the Securities Exchange Board of India.

Commenting on this disparity, a senior debt market dealer said, "Although brokerage firms do not come under the direct control of the RBI, since they deal in products regulated by the central bank, there is an indirect influence that the RBI enjoys over them."

The new service on the NDS, aimed to enable matching of anonymous buy and sell orders, has been dubbed the RBI-NDS-Order Matching, or NDS-OM and will coexist with the existing telephone-based trading system.

Another issue that brokerage firms find acting as impediments to their businesses include discrimination between the NDS and the NSE.