The cost of transaction is the biggest issue in stock market measurement. If one is able to keep the cost low, he will end up serving all stakeholders on the bourses, says Ashish Kumar Chauhan, Managing Director and Chief Executive Officer, BSE.

In a chat with Business Line , he spoke of the challenges and prospects of the nation’s and Asia’s oldest bourse.

Excerpts:

Your immediate priorities and how do you see the market evolving?

The main priority is to provide a fair, efficient, transparent, orderly and cost-effective market.

BSE’s focus is on stock markets – equity, debt, equity derivatives, mutual funds, IPOs, SMEs, QFIs and so on.

One must understand that an exchange is a platform where people pay for services. You need to create a platform that offers the fastest and the best service.

If transaction costs are low, you end up serving practically all stakeholders. Cost of transaction is the biggest issue in market measurement.

We are basically working on the F&O and some product combinations as we have a large share in the retail debt market. In institutional debt market, we are slowly gaining ground because of the infrastructure we have created over the years. Many banks and financial institutions (FIs) dealing in large chunks clear through us. Trades are outside, but clearing and settlement happens though us. The first year of revival of BSE’s derivatives segment just got over. And, we had over Rs 32,000 crore of volumes.

On competition hotting up in your business…

Before NSE came up, many regional exchanges existed. In fact, many of them were large and comparable to BSE.

For me, competition has always been there and it helps investors get better products, besides bringing the transaction cost down.

Importantly, India has a $1.3 -1.4 trillion market capitalisation. The trading in the underlying market may not be that high, but the signal that comes out of the exchange is what determines the wealth of the nation. It has to be squeaky clean. There should be no doubt on the prices and price formations.

Is an anonymous order driven market a panacea, given the chances of orders being expelled. Why not a quote driven OTC type market with a central counterparty?

For me these are several question rolled into one.

Order driven versus quote driven to a periodic call auction is one.

The second is do you transact bipartite or with a central counterparty (clearing corporations).

Markets were quote driven till trading floors existed. With the advent of information technology (IT), order driven markets became more prominent.

For quite sometime, stock markets had specialists such as jobbers and market makers. The NYSE used to work with specialists, Nasdaq with competing market makers and the BSE on jobbers.

In a sense, they had some market making framework ingrained. IT facilitated order driven markets and took away participants’ discomfort about the genuineness of quotes.

So, many markets moved to the order driven system. The US securities market regulator, Securities and Exchange Commission, practically allowed the orders to be matched in between the quotes of the market makers.

Wherever the markets became more organised, the movement had been towards order driven, especially in more illiquid areas.

Even for liquid securities, people might want a particular type of market microstructure, whether it is order driven, quote driven or a hybrid or allows quotes but also allows orders to match in between the quotes. Going forward the world is going to see a lot of experiments.

What about the issue of an algorithm chasing liquidity which may not reflect the fundamental price of an asset class?

As a market mechanism an exchange provides a demand-supply schedule at any point of time. The price of the underlying asset class may be different from its fundamental value at a particular point in time, which is usually the case.

The way the market needs to evolve is to give participants various choices of microstructure.

A particular microstructure may be suitable for one asset class only. One size does not fit all.

In a way, call auctions may be useful. Even today, if a person wants to give a two-way quote he is allowed. That is the beauty of the market which allows various types of microstructure frameworks to be implemented.

There are reasons for each of them to be successful. So, the idea is allow experiments in a way that is understood by market-men.

There are issues of equal market access for all. Other nuances being discussed internationally are: some getting faster access to information not due to technology but due to market place design or some paying a premium for it.

It is more or less settled that each market should have something which allows it to function in a fair and cost-effective manner.

India is practically in the forefront of implementing different types of market structures even within the same stock exchange.

This has been basically due to SEBI’s open-minded approach over the last 20 years. It has allowed this in a structured way which people can understand. It is debated and still the risks involved are taken care of on real-time basis.

SEBI policy on MIIs (clearing corporations) will take away 25 per cent of exchanges’ profits to the Settlement Guarantee Fund of clearing corporations and 25 per cent of depositories’ profits to Investor Protection Fund (IPF). How are going to keep your shareholders happy?

IPFs are for compensating investors in case brokers default. Today, exchanges are expected to provide up to Rs 15 lakh per investor.

This does give confidence in the exchange system. It may affect the profitability of an exchange in the short-term but makes markets safer in the longer term.

Last Diwali (2011), you annulled all trades on Sensex futures as prices went down. What if prices go up?

Exchanges have the powers in their by-laws to annul trades. However, they have to be used judiciously and under exceptional circumstances. The judgment call needs to be taken by exchange administrators keeping in mind the interest of the investors, whether the market goes up or down.

Why can’t exchanges offer both cash settlement and physical delivery in F&O?

The regulation for this has to evolve. Presently, if an exchange offers cash-settled products in stocks then it will have to have all their products as cash-settled. If it offers delivery based settlement then it has to offer only that. Experiments need to be done.

What is needed to bring in liquidity in Indian markets?

Liquidity means different things to different people. Does an individual go and buy from FCI just because say FCI has 20 million tonnes of wheat?

There are many ways to measure liquidity. I would urge retail investors to check whether the liquidity they require is available or not.

With algorithm trading coming in, any plans to lower the latency for non-algo terminals?

BSE has a framework which provides the licence cost for brokers and traders who want to use algo trading. Initially, we said we would help brokers understand algo.

And, we reimburse some vendors who provide this at a reasonable cost. Similarly even in co-location facilities we reimburse the cost.

BSE is trying to make algo available to many and not remain with a select few.

Three years back we had 300 milliseconds latency, today our latency is below 10 milli-seconds. But the world has moved to 100 micro-seconds. We are continuously striving to increase our scalability.

> shanker.s@thehindu.co.in

> raghavendrarao.k@thehindu.co.in

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