The National Stock Exchange (NSE) looms large in the Indian equity market. Its competitors, the Bombay Stock Exchange (BSE) and the Metropolitan Stock Exchange, have an insignificant share in the total business transacted.
The NSE currently accounts for almost 90 per cent of the equity derivatives and spot market turnover, with the BSE accounting for the rest. The NSE’s hold in the currency derivative segment is, however, a little more lax, with the other two competitors vying for an almost equal share.
How did NSE move into this position of strength?
Forging ahead
The enmity between the BSE and the NSE and how the latter dethroned an exchange that was in existence for more than 100 years, with disruptive technology, is now part of Indian stock market legend.
The timing of NSE’s launch in 1992 coincided with the increased use of the Internet in India. NSE could, therefore, rope in a growing number of tech-savvy brokers and sub-brokers, who easily migrated to the more investor-friendly platform. The low opening price of a membership card on the NSE, compared with the exorbitantly-priced and scarce BSE membership, too made many wannabe brokers take to the new exchange.
And how did the BSE lose out? The BSE operated a ring-based open outcry system of trading out of Jeejeebhoy Towers, on Dalal Street, when NSE began its operations.
It was also stipulated to cater only to investors in and around Mumbai (then Bombay). Though the BSE shifted to online trading in May 1995, the government did not give it permission to expand nationwide until 1997.
This delay of few years was the destiny-changer for the BSE, as the NSE forged ahead during this period to become the country’s largest stock exchange.
The gap widened further over the years. Derivatives trading was launched by both the exchanges simultaneously in 2000, but NSE cornered a lion’s share, again because traders preferred this exchange as it offered greater liquidity, lower spreads and better price discovery.
Lower transaction charges on the NSE during the initial period also helped.
Entry barriers
The third stock exchange in India offering equity trading, MCX-SX, now renamed Metropolitan Exchange, has been unable to make any dent in the NSE’s market share since it began equity market operations in February 2013.
The experience with the Metropolitan Exchange suggests that NSE’s near-monopolistic position is not likely to be challenged anytime soon. There are a few reasons for this:
a) Since NSE accounts for the largest part of the turnover in Indian market, it is also the most liquid. Liquidity improves price discovery and reduces spread between buying and selling prices. Most investors prefer to transact in exchanges with higher volumes, as they can get a better price. Again, impact cost (change in stock price due to large orders) is lower on more liquid exchanges, making it easier to sell or buy large quantities.
Due to the above reasons, both traders and investors prefer to transact on the NSE. When the Metropolitan Exchange was launched in 2013, it was expected that some of the volume could shift to the new exchange. But that did not happen and most stock brokers did not even bother to register as members of the new exchange. As a result, the turnover of the exchange is less than ₹100 crore in the equity segment currently, against around ₹20,000 crore of daily cash volume and around ₹2,00,000 crore of equity derivative volume, on the NSE.
b) The other barrier to the entry of a new player in the equity market is posed by the regulation governing the ownership of stock exchanges. A cap of 5 per cent is now placed on holdings of individual shareholders in stock exchanges. Other stock exchanges, depositories, insurance companies, banking companies or public financial institutions, are allowed to hold up to 15 per cent stake in an exchange.
This low promoter holding will deter individuals such as Jignesh Shah (the promoter of Metropolitan Exchange) from floating a new exchange. The low holding restricts both control and share in profits of the new exchange.
This state of affairs is, however, not too healthy since the number of investors in Indian equity market has been stagnating over the last five years; trading volume is concentrated in the derivative segment, and the primary market has also been dull for a while. A new exchange can perk up investor interest, but that is not likely to happen in the near future.