The battle of the bourses

The BSE, formerly the Bombay Stock Exchange, started trading under a banyan tree near the Town Hall of what was then Bombay 143 years ago. In the time since then, the BSE—Asia’s oldest and the world’s 10th largest bourse by market capitalisation—may have been overtaken by its younger rival, the National Stock Exchange (NSE), in market share. But in the past few years, the algo-trading scam and a change of guard in the recent past have caused some setbacks to the nation’s largest exchange, giving the BSE a chance to capitalise on the situation and close the gap in market share between the two bourses.

Fortune India sat down for a candid chat with Ashishkumar Chauhan, managing director and chief executive officer of the BSE, to find out how the fastest bourse in the world—with a response time of less than six microseconds—has fared and its road map ahead. Edited excerpts:

How did the BSE lose market share to the NSE? What is it doing to close that gap?

Firstly, this space is highly regulated; we are more regulated than businesses. If you look back, what were the differences between the NSE and the BSE? One was technology; the BSE was not automated but we became automated later. The second was the organisational structure; the NSE had a corporate structure, while the BSE was a cooperative.

The BSE was late to the derivatives game. Typically, one is likely to trade equities at the same exchange where one trades derivatives. So a gap was created. The BSE had basically zero market share in derivatives, currencies, commodities… pretty much everything except a little bit of equities and some initial public offerings (IPOs). The technology wasn’t considered very good. People had pretty much written the BSE off. Why did the NSE become so big? Not on the back of the past but on the back of the new [offerings]. Derivatives played a big role in it.

So there were mainly five issues which the BSE had to work on—technology, people (talent), lack of new products, small distribution (it was primarily a Bombay exchange, so had to bring in members from outside), and our regulatory reputation was very bad.

Now, around 10 years later, its technology is the best in the world. Latency is gold in this space, so we started advertising ourselves saying we offer a six microsecond response time. We have transformed into a complete tech-oriented organisation. In terms of membership, we have around double the members we had in 2009. We have the best team in place right now. We have introduced all products; some have been successful, some have not. And we now also have a sound regulatory reputation. So those hygiene issues have been addressed.

What is the strategy going forward?

Now we have to figure out if we will go for newer things or follow what others are doing. So we have two strategies: one is the blue ocean strategy—where we can go and create new markets; the other is the red ocean strategy— which is an existing market where one has to capture share. For the latter, one has to consider if an existing market will continue to be a viable one years later.

Trading volumes have gone up 10,000 times in the past 25 years. The question is: Will it go up another 10,000 times in the next 25 years? So the way we are looking at it is—even if one wins the market share game, what is the point if the game itself loses relevance? So this pond is gradually drying up.

Over the past 10 years, whatever were the new products and segments, we have done well in them. [In] offers for sale, we are around 90% of the market; in bond distribution, we are 70% of the market; in SME, we are 60% of the market; mutual funds (MF), we are around 85-90% of the market if you take only the exchange part; if you look at the total MF market, we are 20% of the market in value terms; and we have 40% of all new customers.

In the red ocean, there are six markets. One is IPOs; we are more than 50% in almost all issues. In listings, we are almost three times the nearest exchanges. We started currencies [trading] in 2013-14 [six years after the NSE started it] but we are now the largest market. In the interest rate market, we are second but close by. Two markets remain—equity trading and equity derivatives. Here we have not been successful despite what happened at other exchanges.

What do you think is the reason?

One is that the Singapore Exchange trades SGX Nifty. Whatever is the open position there gets transferred onto India. Now interoperability is coming in. There are margins there. If you have open positions, people will trade there. It is difficult to make them shift. Another reason is that the cost of transactions is very high in equities and equity derivatives because of the STT (Securities Transaction Tax). So even if someone wants to shift to the BSE, they still don’t because the STT for arbitrageurs becomes very high. The exchange has not been able to take equity derivatives, and if you don’t have derivatives it is difficult to get equities because people do arbitrage between the two.

Which are the areas in which you see growth?

At the India International Exchange in GIFT City, Gujarat, we have around a 75-80% market share. There we trade all kinds of derivative products, too. We are larger than the NSE IFSC, with $1 billion volumes per day. So there we have won, pretty much hands down. We in October last year started commodities trading on the BSE. The feedback so far is positive. We are very cost-competitive, so we have managed to attract a lot of people to this space. A week after we started trading in guar seed and guar gum, we managed to touch a 33% market share in it. So there are early signs that we are gaining traction in commodities. We have to wait and see.

In a startup stage, for so many people to shift from an established Multi Commodity Exchange (MCX) to the BSE, it must have been difficult.

We tied up with all the associations for commodities—cotton, soya bean producers, guar seed, metals, bullion, etc. They help us find contacts, delivery centres, etc. These things contribute to some extent in making something a success.

Also, cotton [trading] was launched in Mumbai with the people from the Cotton Association of India ringing the bell. Similarly, guar seed [trading] was launched in Rajasthan, we took the bell there. So we are trying to represent and involve the whole ecosystem, the community of traders and farmers.

What about mutual funds [MFs]?

The future revenue growth area for the BSE is MFs, which we have now made into a paid service. Till last year, nobody paid for our services. The NSE’s MF platform is run by CAMS (Computer Age Management Services), which accounts for 70% of the MF registrar activities. It is a large back-end support. Plus, HDFC MF is a partner in CAMS. So they have a lot of things going for them. Despite that, we have been increasing our market share. Maybe it’s because we have been working hard.

So there is no pointed strategy in place?

The pointed strategy is to work hard, be tech-savvy, and provide service at a lower cost. See, somebody opens a shop, works very hard but still people may not come. However, people keep asking the shopkeeper why nobody is coming to your shop when the next shop is a supermarket and has been there for 20 years. Now, if the supermarket has a minor mishap, it is not like all those customers will come to the shop. So we are gaining some customers. But then they go back because there is no liquidity here. Of the six new areas, we are winning or doing well in all six. Of the six old areas, we are winning in three, losing in two, and one so-so.

How are you preparing yourself for a possible NSE-MCX merger?

We will continue to innovate. We have a good team and robust technology. Our regulatory position is strong. This business is also about reputation. If no mishaps happen over a long period, then people will come to you.

The story was originally published in the April, 2019 issue.