When it comes to investing in stock exchanges, Thomas Caldwell has been ahead of his time. Caldwell started looking for exchanges to invest over a decade ago. In August 2003, he bought the first seat on the New York Stock Exchange (NYSE) and decided to take it public. He made roughly $100 million for his clients acquiring NYSE seats. Caldwell was also the largest shareholder and the governor of the Toronto Stock Exchange, where he made a killing as price of seats skyrocketed from $50,000 to $31 million. Caldwell’s clients have holdings in Hong Kong, Johannesburg, London, Osaka and Toronto stock exchanges as well as the Chicago Board Options Exchange and the International Stock Exchange. Globally, exchanges have announced nearly $100 billion worth of joint ventures and acquisitions since 2005 and Caldwell has been at the helm. He has acquired nearly 4.25 per cent stake in the Bombay Stock Exchange (BSE) and outpaced investors like George Soros, who, too, is hungry for a pie in Asia’s oldest bourse. In an interview with Palak Shah, Caldwell shared his views on the Indian exchange space and more. Excerpts:
Too many exchanges are coming up in India. Is there enough space?
India should be careful of market fragmentation. Too many exchanges in America and Europe have led to problems in establishing price, which is the most important role of any exchange. America has approximately 40 exchanges and quasi-exchanges trading cash securities. This opens the system to gaming and markets become less efficient. Market fragmentation was the root cause of the May 6 crash in the US. Regulators allowed all the exchanges to play by different rules. Hyper competition from mini, pseudo exchanges has siphoned off volumes in the US, and squeezed margins, which is why a stock exchange like NYSE went from $100 to $15. Alternative trading systems don’t add but go overboard, often playing by different rules. They are generally owned by the biggest traders, and this makes all kinds of conflicts possible. It very important for the national exchanges to have a degree of status. I will list my company on NYSE only if it raises its status. In turn, it will also raise the status of NYSE to have high-quality companies. If you diminish the status, and economics, and growth of your main exchanges, less people will want to go public. All they want is a business status for being on one exchange versus another. The London Stock Exchange is having a terrible problem in terms of competition in Europe, but it is still the listing venue of choice. So, these are the exchanges — even if they don’t bring any thing new, they undercut price discovery.
India is different. Maybe there is room for two or three exchanges to grow. You wouldn’t want much more as it may not help development and go against the capital market on several fronts.
There is regulatory arbitrage in India too. What is the solution? Is algorithmic trading fair play?
Regulators everywhere, particularly in America, are open to pressure groups. The solution is to keep things simple. The model for a public exchange is that governance and regulations are separated after it becomes an independent entity and has to monitor its own trading. There is a strong argument for uniformity in regulations. In Canada, there are 13 securities commissions; it’s so ludicrous, we are fighting for one regulator.
High-speed trading is diminishing analyses of companies. As opposed to gamesmanship of high-speed trading, in algorithmic trading, the computer tries to fool everybody. What happened on May 6 is a good example of this — it showed what happens when you trade without a human element. Exchanges have two main functions: Enabling in directing those who have money towards those who have ideas; and maintaining liquidity for financing after investment, which is based on accurate pricing of that listed company. It doesn’t matter how fast you trade or what volumes you trade. You should have the price right; faulty prices shake people’s confidence in capital markets. Such is the importance of price discovery, and having too many players spoils this. New players always tell you that they are helping customers by reducing costs. But, at what price are they reducing costs? It’s like someone comes from the tax department to say he’s here to help you.
NSE is a big player in India. Why did you then choose BSE?
We attempted to buy into the National Stock Exchange (NSE). We liked the management, and that it is a dominant exchange in cash and derivatives. But its valuations have moved up in price over the past few years by 60-80 per cent. On the other hand, BSE has not moved up in price compared to what it was like a few years ago. I’m a value investor and believe BSE has greater upside leverage. You make money with change and BSE is a better company after the recent management change. Madhu Kannan and team has great confidence and better governance. We have high regard for Deutsche Boerse’s Andreas Preuss, who is going to BSE as its director. Moreover, BSE has indicated a desire to become publicly traded, which is usually an attractive step for companies. We feel a greater upside leverage exists in BSE. If we could buy some NSE stake at a reasonable price, we would certainly think about NSE.
Valuations of NSE are not cheap? You think BSE can develop derivatives?
For us, it was really the availability of NSE stock. We were never able to acquire what we wanted and the price went up. BSE‘s price has not risen and yet it has got better. We know about derivatives — we are the biggest owners of the Chicago Board of Trade. The previous BSE management did not have an understanding of the competitive nature of business and derivatives; they should be criticised. Otherwise, with an index like sensex, it’s incompetent to not be a major player in derivatives. My sense is the new management of BSE understands derivatives, and that it will build this business.
Do you see exchanges consolidating in India? Does it make sense for the Indian exchanges to acquire overseas exchanges?
It is hard to carry out consolidation in India owing to a 5 per cent ceiling on investment. You can only do mergers. If you own only 5 per cent, you are going to remain a passive shareholder. Increasingly, there is greater interest in alliances among exchanges. NYSE was a strategic investor in NSE, but the two exchanges did not connect; and it did not help NYSE to get Nifty50 on its platform. Proper alliance is an important factor as there are ownership barriers. Many world exchanges are quite cheap due to competition and over-regulation.
London is cheap. It is losing market share and will have to be efficient but there are synergies that exist, like trading systems, exchanging data. I gave a suggestion to them to go back to the Commonwealth or the old British empire days and have London, Toranto, Hong Kong, Sydney and BSE or NSE in some kind of alliance as they have many similarities. The British liked it. India can look for an alliance with Canada, and there are opportunities everywhere in the US, Europe and Asia where Indian population is concentrated.
