India’s impending third national stock exchange that will start competing for business with the existing two, namely the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) has ruffled many a feather. MCX-SX, co-promoted by Jignesh Shah-led Financial Technologies (FT) as well as Multi Commodity Exchange (MCX), offers trading only in currency futures at present. The bourse is awaiting the securities market regulator’s permission to start trading in equity cash (stocks) and equity derivatives. Also anticipated is a separate trading platform for small and medium enterprises (SMEs) as well as interest rate futures, among other things. However market experts argue that does India really need another stock exchange?
FT group’s abilities are reliable as it has an established track record in setting up and running exchanges. MCX, promoted by FT, dominates the commodities futures market in India with an over 80 per cent market share. MCX-SX is also a strong player in the currency futures segment. The average daily turnover in currency futures traded on the exchange this year is around Rs 12,090 crore, higher than the Rs 11,798 crore on its main rival NSE. The FT group has also gone international with the opening of exchanges worldwide such as the Dubai Gold & Commodities Exchange (DGCX), Singapore Mercantile Exchange (SMX), the Global Board of Trade (GBOT), Bahrain Financial Exchange and Bourse Africa. Of these, DGCX is doing relatively well, while the others are yet to see a significant turnover.
Thus the issue is not with MCX-SX’s credentials as it is with the basic justifications for its existence. Here’s the problem with a potential third exchange: Unlike in a developed market like the US, where the two leading stock exchanges—NYSE Euronext and Nasdaq OMX—have very few stocks in common traded on their platforms, a majority of the stocks are listed on both the NSE as well as the BSE in India. A third exchange would water down the liquidity away from the other two exchanges by offering trading in the same set of stocks, say experts. This is probably why many of the world’s top financial centres have only one dominant exchange. In Japan, the Tokyo Stock Exchange (TSE) accounts for 96 per cent of the total trading value. In Germany, the Frankfurt Stock Exchange accounts for over 90 per cent turnover in the German market. The US offers a slight variant to this rule where two exchanges remain dominant: NYSE Euronext has about 25 per cent market share in total equity trading, while Nasdaq OMX has about 20 per cent.
However any market is better off without monopolies and MCX-SX can play a valuable role in thwarting them in India. For example, in December 2009, MCX-SX had dragged NSE to the Competition Commission of India (CCI) alleging predatory pricing in its currency derivatives segment through cross-subsidisation from the monopoly profit made in the equity cash and equity derivatives segments. In June 2011, CCI found NSE guilty of abusing its dominant market position and asked it to stop unfair trade practices such as subsidising services.
