Rival NSE rained on its parade by moving the maturity of Bank Nifty contracts to Friday, just as the BSE seemed to be getting its act together to revive the derivatives segment. This will affect market appetite for weekly options on BSE’s Sensex and Bankex contracts, which expire on Friday.
In a personal interview with Monetary control, BSE Managing Director (MD) and Chief Executive Officer (CEO) Sundararaman Ramamurthy spoke about the risk of concentration in the Indian market and the steps BSE is taking to improve market share. Edited quotes:
How do you react to NSE’s latest move to move Bank Nifty maturity to Friday? It is clear that this will have a negative impact on BSE’s newly issued weekly options volumes.
I have nothing to say. It is their decision. I can only do what I have to do to make my product successful.
What made you take up this job considering that none of your predecessors despite their best efforts could make a difference in the exchange’s fortunes?
When I left NSE in 2014 after a long time, I never thought I would come back to the capital market. After NSE, I spent about eight and a half years at Bank of America. The main reason I am taking up this role is to bring about a wake-up call to the capital markets. I am concerned about the way the market has developed in the last eight years or so since I left the NSE. NSE had a 75 per cent share in the cash market, which has now increased to 93 per cent, and has a near monopoly on equity derivatives and currency options. When you say you are number five or six in terms of market capitalization… this and that… you are the biggest in terms of number of trades… you put it on WFE and all other forums, but what does it actually mean? All this is centered on a single platform, a single segment called Equity Derivatives, a single product called Index Options, two-quarter indices… Nifty, Bank Nifty and now to some extent Fin Nifty. Given today’s level of cyber threats and technological disruptions, is this kind of concentration good for the market … assuming there is more growth to come? If someone wants to beat India, what should that person do? Just hit NSE. Second, with this type of concentration, the first to win is corporate governance. It needs no explanation. All things considered, I saw this job as a God-given opportunity. I have nothing to lose. I had a successful career. So I am not driven by the fear of career failure or financial failure, it is an opportunity to make a difference in the Indian markets as best I can.
What steps have you taken to revive the transaction volume on the exchange and what has been the response so far?
Until March, the tick size was one paise for stocks up to Rs 15. We have increased the limit to Rs 100, which means stocks up to Rs 100 will have a tick size of 1 paise. This has brought in a large amount of liquidity in these stocks. Fifty-two percent of the volumes in these stocks are delivery-based. These shares are mainly bought by retail investors. Also, the impact cost of these stocks is less compared to other exchanges. We have gained market share in these stocks from 9 percent to 12 percent by trading volume.
We are also trying to engage with institutions… At present, only 4 per cent of institutional volume comes on BSE. Firms, by nature, do not issue market orders, they issue limit orders. If they place limit orders, they don’t have to worry about the exchange executing the trades. It is in the national interest to maintain BSE to address the risk of concentration and bring dynamism to the market. Consciously, they should start diverting some volumes to BSE. They do not lose because they place limit orders, not market orders.
Even if they place limit orders, liquidity must be available to execute the orders. How do you address it?
If there is order flow, counter orders can come. Another way is that I place orders only if there are counter orders. That can lead to a chicken-and-egg situation. There are different types of market players. Some of them look at the screen for opportunities. If you see large orders or large orders being chopped into smaller orders, not very small orders, immediately, their algos start to work and start placing counter orders to match them. Not that if the orders are placed, they don’t match at all. BSE is so illiquid that even well-traded stocks do not have matching orders. A limit price order distributed between BSE orders, with specific instructions to place it on BSE… And I gave you this (order) five minutes ago, tell me, firms should not sit on brokers’ heads saying yes. Is it implemented or not? If they give them some time, the order will be filled. Over time, the market will realize that firms are diverting some amount of their flows to BSE. Then they will come and stay. Then liquidity will not be a problem. If the largest domestic firm says it will increase its stake in BSE by 2 per cent till it reaches 20 per cent, more brokers will queue up on BSE to check if any institutional orders come in.
It won’t happen overnight. But we will continue to engage with institutions.
What about Foreign Institutional Investors (FIIs)? How do you get them to trade on your platform?
Today, FIIs do block deals on BSE, but their routine trades are done on NSE. Some of the brokers say that they are exchange-agnostic, but they prefer changes in the contract notes, i.e. a single VWAP (volume weighted average price) for a security, per order, per FPI, across exchanges for a day. will be created. FPIs are exchange-agnostic but require a single contract specifying the end-of-day VWAP for the shares they buy or sell. If trades are executed on two exchanges, the prices of both the exchanges should be taken and a single VWAP should be arrived at and provided to the FPI. Currently, most brokers use a single VWAP for an exchange because by default almost all deals are done on one exchange (NSE). Their VWAP computation takes feeds from both exchanges and does not calculate a single VWAP. If they do not, the FPI will receive two different VWAPs for the same security on the same day for the same order with a broker. Brokers understand the problem, custodians understand it and clients (FPIs) are fine too. All the parties concerned are working on it because they understand that it is better to have multiple exchanges. A lot of effort has been put into engaging with institutional partners, and I hope this will come to fruition at some point.
You said that last week the exchange did a turnover of Rs 70,000 crore in the derivatives segment, but that is still a hypothetical value, right? Premium turnover will be very low.
In equity derivatives, which we have started with the relaunch of Sensex and Bankex derivatives, we are focusing more on Sensex contracts and we are finding some traction. The market is slowly warming up to Sensex as a product. We can see that from the increase in trading volumes in the last three expirations. The premium turnover may not be huge…granted, but the number of contracts traded…more than a million, open interest…more than a lakh contracts shows that the market is interested.
When we started a few months ago, we found that only two software vendors offered front-end support for trading in BSE derivatives, GreekSoft and Refinitive. Many brokers have KYC facilities for clients only with NSE and not BSE. But today, at least a dozen software vendors provide support. TCS, Odin and RupeeSeed are the three that are yet to be supported. We appealed to them and hope they will join.
We offer colocation services at a fraction of NSE (offered price). We started talking about it with market participants. We are starting to see demand for our COLO spaces. People are now coming to us for approval for algo trading as the front ends are now operational.
You have canceled the benefits given to trading members to increase liquidity in the derivatives segment from April. NSE indirectly provides discounts to drive volume in its options segment. How do you expect BSE’s volumes to rise if you don’t provide incentives to members?
Liquidity Enhancement Incentive Scheme (LEIS) is one way to increase liquidity. I don’t want to go into its pros or cons. All I can say is that this has not led to sustainable liquidity in the derivatives segment of BSE. There are other ways to increase liquidity. At Sensex, we provide a complementary product (to Nifty) that can be traded with an existing product. We provide an ecosystem where new products can be introduced, we provide an ecosystem where capital utilization can be optimized. We provide an ecosystem where the product is self-sufficient to pay less. That is what I promise.
When launching a new product, there are usually three types of players. The first type are those who have been waiting for such a product and are well prepared to move quickly. I spoke to about 300 brokers before relaunching sensex (contract). The response of 150 of them has been very encouraging and many of them have already started trading. The second category is the players who have to make arrangements to start trading in the product even if it is good. The third is waiting players. They are also great players. They will wait a few weeks or months to see how things are going. As volumes rise, they tend to surge, which is what makes the difference in liquidity. We work with everyone. We are confident that we have passed the first stage.