They have been locked in fierce competition to gain supremacy in the nascent market for currency futures trading. But the battle between the National Stock Exchange (NSE) and Financial Technologies (FT) is now being fought in the courts too, and has taken many other forms — from blocking technology access to predatory pricing, and more.
NSE, which enjoyed a virtual monopoly in the stock market, had a taste of real competition when FT launched MCX-SX, a stock exchange, and started currency derivatives trading in October last year. It’s been a see-saw fight ever since, with daily trading volume data for February showing MCX-SX’s market share at 50.23 per cent to NSE’s 49.77 per cent.
| THE BATTLEFIELD Who operates what | ||
| NSE | FT/MCX | |
| Technology | Now, NSEIT, OM NSESYS | ODIN |
| Stock exchange | Equity, F&O and currency | Currency |
| Commodity futures | NCDEX | MCX |
| Power trading | PXI | IEX |
| Overseas exchange | 5 exchanges | |
MCX-SX hasn’t started operations in cash and futures & options in the equity segment because it is awaiting regulatory approvals. Figures show NSE is the uncrowned king in that segment with the Bombay Stock Exchange a distant second. FT, however, is giving NSE a run for its money in every other segment. Consider these facts:
Technology: FT’s technology, ODIN — a major revenue earner for the company — is used by 80 per cent of NSE’s stock brokers. The software allows brokers to access different products on different stock exchanges on a single screen.
Commodity exchange: FT-promoted Multi-Commodity Exchange (MCX) commands a market share of over 80 per cent market share; the National Commodities & Derivatives Exchange (NCDEX), co-promoted by NSE, lags far behind.
Power trading: The FT-promoted Indian Energy Exchange (IEX) has over 80 per cent market share.
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Points of presence: NSE’s is largely an Indian operation, whereas FT has set up exchanges in Dubai, Singapore, Mauritius, Africa and Bahrain.
NSE fired the first salvo by hitting FT where it hurts most. First, it bought stake in a software company called Omnesys, developed its own technology called NOW, which is similar to ODIN, and offered it to brokers free for three years. Critics call this predatory pricing, but an NSE spokesperson said the exchange has always tried to reduce costs to its members. “Our NEAT software given to members is also free and providing NOW (free) is in line with that policy,” he said.
Second, it put ODIN on its watch-list and rejected FT’s application for any new installations or licences.
FT, however, was quick to hit back and moved the court, saying NSE acted with mala fide intentions of stifling competition.
The first round of the court battle has gone in favour of FT, with the court saying, "the allegations in respect of malafides have considerable substance", but without giving an opportunity to NSE to reply "it is not proper to decide as to whether the compliant regarding the defective software ... is reasonable" and whether NSE's approach is "rather malafide" towards FT.
The court also observed that NSE can’t use its whims and fancies to pick and choose vendors.”
In another order dated January 30, the court ordered a systems audit and said NSE should not deny approval for the product for new users, and existing users should continue using it.
NSE has appealed against the order on systems audit and said putting FT on the watch-list was in good faith based on deficiencies in the software reported by trading members. The court later allowed KPMG to carry out the audit of FT's software.
ODIN is just one of the many battles in which the two exchanges are locked. On currency futures transactions, the fight is over transaction fee.
NSE, for example, has kept zero transaction fee on currency derivatives — a practice that MCX has criticised.
“NSE is cross-subsidising its currency futures business through its income from the F&O segment. This is against the concept of a level playing field,” an MCX-SX spokesperson said.
NSE, however, says this is not unusual because any new product requires some efforts in market development. Typically, during that period, NSE does not levy transaction charges. This has been the case in most product launches such as Mini Nifty, Nifty Junior, CNX 100, Defty, etc.
The fact is NSE can afford to keep transaction fees at zero because it has a substantial income from other segments such as derivatives and equities.
On the other hand, MCX-SX’s income is entirely dependent on the transaction fee from the currency segment. So it is in a classic Catch- 22 situation: it will not be able to compete with NSE if it imposes a transaction fee. But if it doesn’t levy a transaction fee, the exchange’s financial viability will be in question.
Observers said the market regulator should look at enforcing either a minimum transaction fee or allow new exchanges to launch cash and F&O segments if it wants to ensure fair competition.
Commodities:
Pricing holds centre-stage in yet another battle between the two exchanges. NCDEX reduced transaction charges to just 5 paisa per lakh for trades after 5 pm, against Rs 3 per lakh for trades in the morning session. NCDEX’s competitor, MCX, which has close to an 85 per cent market share, witnesses high turnover in the late evening session and the NCDEX move was clearly aimed at wooing customers away from its rival.
That may be a perfect strategy in a competitive marketplace, the regulator, Forward Markets Commission (FMC), stayed the NCDEX move, prompting the latter to move the Bombay High Court.
The court, however, dismissed the petition and observed that “the decision of the petitioner [NCDEX] … will lead to excessive speculation of agricultural commodities.”
NSE and NCDEX refrained from commenting because the subject is sub-judice,
an MCX spokesperson said that “all exchanges were following a certain discipline that had been broken with this legal battle. Healthy competition should be ensured.”
NCDEX is believed to be moving the Supreme Court on the matter.
Power trading:
Spot power trading is the fourth area where the two exchanges are slugging it out. Here again, IEX, promoted by FT, enjoys a more than 90 per cent market share. But when MCX had asked FMC for permission to launch electricity futures, Power Exchange India (PXI), the power exchange jointly promoted by NSE and NCDEX, petitioned the Central Electricity Regulatory Commission that FMC doesn’t have powers to give permission for electricity futures. The case is still being heard by CERC.
Finally, what’s in a name?
A lot, it seems, if one goes by NSE’s decision to challenge the name “National Spot Exchange” promoted by FT. The exchange has nothing to do with the stock market; it is a market for farmers to sell their produce on a spot basis. The exchange was incorporated as a company in May 2005 and signed memoranda of understanding with state governments. But NSE challenged the name because it closely resembles its own name.
Going by the hardening stand taken by the two exchanges, the battle seems to have just begun.