The two years of Madhu Kannan at the helm have seen a slew of initiatives to turn BSE around, but the efforts are yet to bear fruit.
“It was never easy for anyone to break into the ‘brokers club’ (BSE) and run it professionally. There were credibility and legacy issues. The new management has definitely put a strong governance structure in place,” says a BSE shareholder and a former board member of the exchange.
“The first phase of BSE’s turnaround is over. You will see more action as we step up execution of some new initiatives in the next phase,” says Kannan, former head of business strategy of the New York Stock Exchange who is trying to put in place the building blocks of a new-look institution.
The National Stock Exchange (NSE), the leader in equity trading in the country, has just allowed cross-exchange algorithm trading and resolved a long-standing dispute with BSE. This, combined with smart order routing (SOR), will bring more order flows. This is likely to generate higher volumes for BSE in derivatives.
“It took us over a year to introduce SOR after we first started pursuing it. Absence of SOR and cross-exchange algorithm trading has cost BSE dear. Again, traders will have to take permission before they start routing their orders. I hope this will not cause further delay,” Kannan says.
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SOR allows traders to choose between exchanges for best price before executing orders. NSE had put restrictions on the flow of orders from its co-location facility to other exchanges, citing risks. Algorithm volumes currently constitute around 25-30 per cent of the overall market volumes and no orders in this segment had hurt BSE badly. But there is hope.
Besides lobbying for SOR, BSE has, under Kannan, taken measures like cutting deposit-based membership fees by 90 per cent, changed the settlement cycle for its derivatives segment to mid-month expiry and announced physical settlement in the derivatives segment. Initiatives like mobile trading, new BOLT terminal, Fast Cast, E-Cast and pre-open trading in common scrips, besides faster processing systems, have seen significant action at BSE. Also, the exchange is in the process of setting up a major data-recovery and risk-management site in Hydrabad. It already provides co-location facility at less than half the cost of NSE.
| BSE UNDER KANNAN |
Projecting BSE as a complete solution provider
Developments |
- IPO market share at 75%
- Leader in trading of mutual fund units
- Currency market share of 15-20% Initiatives to push volumes
- Physical settlement in derivatives — volatility will be reduced, stock lending and borrowing (brokers favourite Badla) system to be revived, securities transaction tax to be lowered
- Derivative expiry changed to mid-month
- SOR — through this brokers can choose between exchanges for best price quote for a stock. (This allows better fill and hidden liquidity to the investor community)
- Market making schemes — This will get the much-needed liquidity (currently pending with Sebi for approval but )
- Sensex futures launched on Eurex, one of the world's largest liquid exchange for derivatives (Volumes will pick up once the domestic markets revive)
- Number of members raised by lowering fees by 90%
- Over 4,000 stocks available for pre-open session (Could bring liquidity to dormant counters)
- IPO book-building through web introduced
Technological changes
- Advances BOLT — brings cash and derivatives on the same platform
- Response time reduced from 200 milliseconds to 10 milliseconds per trade
- Capacity increased from 1,000 orders per second to 20,000 orders a second
- Order-to-trade ratio raised from 5:1 to 19:1 (large increase in quotes available)
- Orders go up to nearly 30 million per day
- Co-location introduced, this will allow order flows to NSE
- Mobile trading initiated
Challenges ahead
- Falling cash market share. Volumes down to 22% from 28% two years ago.
- Nil equity derivative volumes
- Capitalising on brand Sensex. NSE’s Nifty is more popular among foreign trading community
“Once there is clarity on the Jalan committee report, you will see more action. After consolidating various segments and preparing a road map to the present BSE as an end-to-end solutions provider, in line with global exchanges, we are in execution stage of our strategy. The morale of the team is high and we are confident of pulling off a turnaround in the next couple of years,” he says.
CRITICS SPEAK
NSE still corners the lion’s share of trading volumes and analysts tracking the exchange say BSE is headed nowhere. The exchange is surviving on income from treasury investments while NSE exploits its edge with electronic trading platform.
“You cannot say BSE has changed till equity volumes improve. Only employee cost for BSE has gone up in the past two years,” says a Mumbai-based stock broker and shareholder of the exchange.
NSE’s benchmark index, Nifty, is most preferred trading index due to higher liquidity. Also, BSE’s volumes in cash trading have plunged nearly 45 per cent in the past 16 months, with retail investors cutting trading and speculators preferring derivatives bets. Average daily trading in the spot market at the exchange fell to around Rs 3,400 crore in April, from over Rs 6,000 crore in January. But cash segment volumes have declined on NSE too, by over 25 per cent. In the cash market, its share has fallen from around one-third share in 2005-2006 to around one-fifth in 2011.
However, in the derivatives segment, the daily average turnover has gone up to over Rs 98,000 crore. This is driven largely by bets in the options segment, which is largely notional in nature. Market players say it is very difficult to move liquidity when it is firm on a particular exchange. Domestic derivatives market has grown on the back of the index and single-stock futures.
Exodus of people from BSE, too, has caused negative publicity for the exchange. Senior executives like James Shapiro, head of corporate strategy; Eric Czervionke, head of index and data; and Anjan Choudhury, chief technology officer, are the latest to have quit. Top-heavy management and fat salaries are also bleeding BSE. Also, global exchanges like Singapore Stock Exchange, which is a shareholder of BSE, are more comfortable working with NSE.
IN DEFENCE OF BSE
Before Kannan and his team took charge, the exchange was suffering a major credibility crunch. Broker members not only ran proxy management but were also known to pass vital market information to punters. Besides lack of initiatives to revive dormant equity derivatives, manipulation in small company shares on the listing day, technical snag and rate card for getting scrips in and out of circuit filters also marred the image of the exchange.
“Two years ago, order flow on BSE had witnessed a substantial decline. There were complaints from clients regarding lack of efficient technology. We have improved on this. Our technology is now on par with any leading global exchange and the order flow has also improved. Similarly, several changes have been made to the derivatives segment,” says Ashish Chauhan, deputy chief executive officer of BSE.
On the mass exit of some old hands from the exchange, Chauhan says the industry has a very low churn ratio and productivity of the exchange has not been affected. “Churning is healthy. Many were working with the exchange for over a decade, so a change to improve productivity was required,” says Chauhan.