The exchange is losing a lot of cash as it does not impose any transaction cost
Barely two months after it set the world record for trading the largest number of currency contracts in a day, the euphoria is completely missing at the United Stock Exchange (USE).
USE debuted in September with currency futures trading of over Rs 45,000 crore, miles ahead of the National Stock Exchange (NSE) and the MCX Stock Exchange (MCX-SX). Since then, trading volumes have crashed around 90 per cent.
While the currency segments of NSE and MCX-SX are generating a combined average daily turnover of over Rs 25,000 crore, USE has reported only Rs 4,000-5,000 crore in November.
Another indicator of the poor interest in USE is the low average open interest position relative to volumes. Since its launch, daily open interest has averaged a measly five per cent of the total daily volumes. The figures are much better at NSE and MCX-SX, which have an open interest of around 38 per cent and 30 per cent, respectively.
Open interest indicates depth or liquidity in the futures market. Lack of open interest means day trading activity is high.
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USE Director Gaurav Arora said, “Initially, volumes were high, as most banks traded heavily on the back of high currency volatility. Volumes of other currency exchanges which started operations much ahead of us picked up only after eight-nine months of their launch. It takes time and continuous education to get participants on board.”
USE was betting on the fact that it was backed by 26 domestic banks and New-Delhi based Jaypee Capital, which usually generates majority of volumes in the segment. Arora, whose Jaypee Capital has been the largest volume provider on all derivatives exchanges (NSE, Multi Commodity Exchange, National Commodity & Derivatives Exchange Limited, MCX-SX), played a key role in setting up USE.
Other shareholders include Riddhi Siddhi Bullion, owned by top gold trader Prithviraj Kothari, MMTC and India Potash. These shareholders generated most volumes in the first few days.
Observers said while the support of so many banks helped it the initial days, USE needed to attract other participants, as there was a limit to which shareholders could provide liquidity. “The bourse will have to attract large export and corporate houses which trade currency to hedge risk,” said a broker.
A senior executive at a large public sector bank said the exchange had limited base. Banks did put in trades through USE to give impetus to the bourse. “But we cannot ignore the reality that it has a limited base compared to competitors. There are too many exchanges. Banks have to take a call on where to trade,” he said.
Arora said USE was on an aggressive membership drive. While over 200 participants are already members, another 300 applications are under process. “We are conducting regular workshops for traders,” he said.
However, USE is burning a lot of cash with each passing day, as it does not impose any transaction cost. To corner market share, NSE had first waived transaction charges, forcing others to follow. The move can only work for NSE, as it can use its highly-profitable equity segment to subsidise the currency segment. MCX-SX can also pare the cost to some extent, as it is a established player in the exchange industry. But, USE has no such comfort.