Ashishkumar Chauhan has played a key role at the Bombay Stock Exchange (BSE) since 2009, in putting up some building blocks for a new-look institution. However, the country's oldest bourse still faces the challenge of gaining a decent market share and competition will only intensify once MCX-SX starts equity and debt trading on its platform. But Chauhan, who was appointed the chief executive officer and managing director of BSE on November 2, says his strategy to make the bourse an exciting trading venue is in place. Excerpts from an interview with Palak Shah:
BSE has undergone several changes since 2009 and also spent huge money in the process. But, how will you create that much-needed excitement for the bourse, that can change old perceptions?
BSE will be the most exciting trading venue for the next 10 years. People only see that BSE has spent Rs 100 crore as incentives for derivatives in the past one year, but not many critics know that, trading on the exchange has resulted in savings of around Rs 1,400 crore for the industry. This is our estimate. Transaction cost on BSE is 99 per cent lower than the rival market leader. Again, membership cost, including refundable deposits, on BSE is 90 per cent lower than that of rivals. Membership fee of BSE is Rs 5,000, compared to Rs 5,00,000 on NSE and MCX-SX. After the membership fee cut, BSE has attracted over 500 brokers and has a total of around 1,500 registered members. Efficiency of the BSE platform has improved manifold over the past couple of years. We have been able to cut trading speed from 300 milliseconds to just 10 milliseconds. In the coming months, further technology upgrades will ensure capacity of 2,00,000 orders per second. Trading speed will touch 200 microseconds, which will put us in the league of the top 10 globally.
BSE is tying up with Cisco for changing networks across the country. In terms of products, BSE has all key offerings that rivals have and all these are available for brokers at the lowest cost. Most players are now coming to the BSE to save on costs. BSE’s consolidated operating cost for financial year 2011-12 was Rs 248 crore, which included cost of depository, clearing and settlement and technology services. This is at least 50 per cent lesser than the operating cost of exchanges in India and abroad on a standalone basis and, in the past three to four years, BSE’s increase in operating cost has been the lowest. Also, considering that trading and other costs are lowest on BSE, its revenue can only increase, going forward. The focus will be on core areas like equity, retail debt and SME segments. Technology and the risk management framework will constantly evolve on BSE and you have to be humble to understand that as an exchange, there is no Nirvana.
Not much of all this is reflected in BSE’s cash and derivative market share, mainly supported by incentive schemes. What is the road map?
Again, this is just a perception. BSE is now the third largest equity options trading place in the world. the options trading cost on BSE is 99 per cent lower than rivals. The derivative market share of BSE has risen from nil to 22-25 per cent. The fall in cash market volumes has been arrested and has stabilised at around 20 per cent. You will see the rise in the coming months. Participation is growing on BSE. In the last one month, the exchange has attracted 25,000 new retail investors, compared to 2,500 in the past one year. So, our strategy to increase distribution and take it to the smallest of towns and cities is on the right track.
The low cost of connecting to the exchange has worked well for the industry and confidence in BSE is building up. Foreign institutional investors (FIIs) have started trading in derivatives and many are putting their strategies in place to trade in BSE’s index derivatives. Algorithmic trading has picked up and so has the real time gross settlement system. The Sensex and BSE 100, two of the oldest indices, have seen good action in the derivative segment. BSE follows the delivery-based trading system, key to bringing down volatility. According to feedback, new product cash future spread needs some changes and we expect it to gain popularity. Offer for sale, trading in small and medium enterprises, mutual fund distribution, e-IPOs and retail debt have seen action on BSE and the exchange has majority market share in these segments, though more volumes are required. The SME segment has seen 11 IPOs on BSE and there are 50 market makers giving two-way quotes constantly during the day. When we started marketing a few years before, brokers told us BSE lacked liquidity and technology was not up to the mark. Now, participants have figured that BSE can provide both liquidity and high-grade back office and trading technology, that too, at the lowest cost.
We are incentivising brokers to bring retail clients to BSE and have products to cater to players in all segments, from retail to FIIs. The exchange has put its muscle behind its marketing, sales and distribution network.
After all this, why are volumes on BSE not picking up?
Among the key reasons is high statutory cost on cash equities. While stock trading attracts securities transaction tax (STT), there is no such tax in the commodity segment. This has resulted in shift of volumes from equities to commodities and investors are finding it more attractive to trade (Indian market) in places like Singapore and Dubai. Around $80 billion worth of gold and silver is being imported every year. If that kind of money is channelised into the stock market, more than 40 lakh jobs would be created No tax on bullion trading and highest tax on delivery-based trading is similar to not levying any taxes on cigarettes and taxing food items.
BSE will go public next year. Don’t you think valuations will be affected if it does not gain substantial market share before the IPO? Also, manipulation of stock circuit filter norms, which are only broadly described, is giving a bad name to exchanges. What is your strategy?
It is the right time for investors to buy in BSE. As a low-cost venue, the exchange is expected to grow at a much faster rate. Investors would prefer securities that are not fully priced. On the circuit filter norms manipulation issue, there are transparent rules in place and detailed norms on the BSE website as to how scrips are shifted in and out of circuits. These decisions are taken jointly by all exchanges and the regulator. Still, if there are any specific and precise complaints, we will take it up with the regulator.
