The NYSE Euronext, one of the world’s largest stock exchanges, has been watching the India scenario closely. It sold a five per cent stake in the National Stock Exchange (NSE) in 2010 as the latter tied up with rival Chicago Mercantile Exchange (CME) in the US. Lawrence Leibowitz, chief operating officer of NYSE Euronext, spoke to Palak Shah on his bourse’s India plans and race among global exchanges. Edited excerpts:
Indian exchanges are among the fastest growing globally. Was your decision to exit NSE right? The share price of MCX rallies every time you come to India.
NSE’s move to tie up with CME was partly the reason why we had to exit the exchange. In the medium term, it limited the scope of operations that we could do together. It became difficult to access what strategic value we could draw with NSE as we were not looking at it only as a financial investment. The markets had also cooled down. NSE is a strong competitor, it has got better technology in India and leadership position. The MCX group is hoping to rival them with MCX-SX and they are strong competitors. Obviously, NSE has done a good job of encroaching BSE’s space, but MCX-SX is a different animal. It would be interesting to see how competition plays out. The five per cent position that other exchanges and players have in Indian exchanges is very small. We were made to believe the ceiling would be raised but it did not happen. In the future, if it is raised, we would reconsider investing.
Exchange ownership is not the only way for a long-term relationship. We are spending a lot of time on building technology relationships here with exchanges, including that on order flow and seeking strategic partnership for cross listings on derivatives.
What is your view on BSE? Do the new Sebi (Securities and Exchange Board of India) regulations give a fair chance to compete?
It is not about a fair chance. Competition does not wait. To compete today, technology has to be good enough and the exchange management should take steps that make them competitive. Some regulations do not make sense and are cumbersome. Regulator should allow players to build exchanges that can compete globally. We have some similar regulations in the US like a separate regulatory and business arm, which may be good. The market share of BSE still needs to stabilise, it is not in a good position. When we were partners with NSE, I can say of that time, they had done a good job of upgrading systems and supporting more electronic trading. They are offering everything that technology regulations allow in terms of direct market access, smart order routing, cross-margining, high frequency trading and so on... all this is part of technology that every modern exchange should have. Trading practices that take advantage of speed are relatively new in India. They will mature as the regulator allows more activity.
There is a lull in activity among exchanges globally. Consolidation and alliances are not working out. Your strategy?
Consolidation has proven difficult due to regulatory and national interest clash. Singapore and Australia were examples. The London Exchange and TMX deal was another. The NYSE Euronext and Deutsche Borse was more due to competitive reasons. Exchange alliances have not proved fruitful either. We are in a business of scale, consolidation among exchanges has to pick up again when climate changes. Till then, we want to develop partnership for new products, do our best to develop technology link-ups for easy order flows around the world.
Right now, it doesn’t look like speed will be the only important thing in this particular part of cycle, probably because there isn’t a lot of trading activity. Currently, if you make order flow easy globally, micro seconds don’t really matter as much. Speed is inherent between exchanges and clients anyways. So is a balance to have better connectivity around the world and enable small exchanges to have good technology to play in that game.
Are you underplaying the importance of speed as it has led to market chaos recently?
First, I don't think speed is causing chaos in the market. Regulators need to show they can do better surveillance and convince people that modern trading practices are not bad. Second, I think more alliance on technology are required from exchanges and brokers to improve their quality. Complicated market structure will require complicated technology. This means any break down in the chain can cause problem. Markets have seen technology advancements for 30 years. It is only now that press makes every problem, like a network router break down in Tokio, to appear big. The more we rely on technology, it is our responsibility to ensure it works. But not all things are in our control, even as exchanges. It is all pieces in the puzzle--the brokers, exchanges, vendors. And regulators can't quite know how to manage this world.
There are no check and balances for modern trading technology? It is causing billions of dollars of loss. How big is tech solutions business for exchanges?
No matter what we do, we will have tech breakdown. We must ensure they happen less often. The US has not seen billions of dollars of loss. In the Facebook case, the problem was not just technology, but also the exchange management. It is important how you react to the tech problem. When it breaks, people must see it recovers well. Like modern cars. You open the hood, its all computers now operating every other thing in car. When struck with problem at 60 miles an hour, people in car will have to handle it. They should know their job. So you got multiple lines in here too. Develop systems efficiently, react well during breakdowns or control with things like circuit breakers. Flash crash will never happen again due to circuit breakers. So, it is as much a people problem as technology. In the US, we are looking at all aspects and there are good regulations on technology surrounding dark pools and brokers. There will be more specific regulations, going ahead.
Allowing competition without barriers will push transaction cost to zero. It is happening in the US. After competition came in, share of transaction revenue has gone down as a percentage of total revenue. So, exchanges are going behind tech revenue and it is a big source. Not every exchange will be tech provider, they can't afford it. Four, five exchanges will be real tech providers to the world. It would be an important part of their revenue. Now, exchanges will get revenue only on segments where they can add value. Exchanges are tech solution providers not only to other exchanges but even brokers and institutions.
Are exchanges banking on OTC market to come on their platform?
It will take lot of time. Brokers and bankers, who control this trillion dollar market globally, are not letting it happen. Key feature of OTC (over the counter) market is understanding counter party risk. Very few people knew AIG (American International Group) was the largest issuer of derivatives in the world in 2006. That shows there was no centrally reported clearing arrangement for OTC derivatives. Even the regulators and clearing houses are not geared up for this.
