With the entry of MCX-SX into equity trading as the third stock exchange, competition between the exchanges — Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) — would be intensified. The question is whether this competition will benefit investors?
MCX-SX has already been in operation in the currency derivatives segment since 2008. The exchange sought permission in 2009 for new asset classes, including equities, to be offered on its trading platform. The Securities and Exchange Board of India (SEBI) has granted it permission to deal in equity and equity futures & options, interest rate futures and wholesale debt segments “with certain conditions” on July 10.
Healthy competition is crucial for market development and inclusive growth of the industry, as seen in the case of other regulated sectors such as banking, insurance and commodity exchanges.
Moreover, a full range of financial products are imperative for a vibrant financial market system. Indian markets have remained undiversified for decades, as exchanges have failed, even lately, in their multiple attempts to launch globally popular products.
Even today, the markets are shallow and narrow. Contribution of top five cities to cash market turnover stood at 84.8 per cent for NSE and 68.7 per cent for BSE in May 2012, indicating a large potential for financial inclusion in Tier-II and Tier-III cities.
“New players bring new ideas, reach out to new investors and bring new investments that help product development, better services, better infrastructure, better technology, greater awareness and cost optimisation. I am sure capital markets will benefit from this positive development and through all the incremental impacts stated before,” said Joseph Massey, Managing Director and Chief Executive Officer of MCX-SX.
“Building on our membership base is an ongoing process at the exchange, and MCX-SX already has a strong membership base of 750 for its currency derivatives segment. We will definitely go on strengthening this base for improving penetration and enhance access to the market,” said Mr. Massey while talking to The Hindu.
Focus of MCX-SX would be to broad-base the markets through investor awareness and education and greater investment in research, said Mr. Massey. There are 21 million (which is less than 2 per cent of India’s population of over 1.2 billion) demat account holders, indicating very low direct participation in equity markets. In matured markets, direct participation is as high as 30-50 per cent. In the U.S., out of a population of 300 million, more than 50 per cent participate on exchanges.
Another issue is the dominance of one segment, equity, which currently accounts for more than 75 per cent of market activity in India. In developed countries, the trend is the reverse, with bonds accounting for more than 80 per cent of trading in some markets.
Further, there is concentration of liquidity witnessed in single index, the 50-share Nifty, and top 100 scrips with the equity cash market steadily on the decline. At present, over 90 per cent of total equity turnover is in the cash settled futures & options, and delta trading (a complex trading model used by market specialists) does not contribute to capital formation.
Development of Indian capital markets would be complete when new asset classes that are best suited to the various investor profiles are made available, said Mr. Massey.