BSE: New Team Mission

Bombay Stock Exchange (BSE), the oldest stock exchange in Asia, is ready to do the battle. It’s a battle to claim the lion’s share of the stock market, a battle to get maximum number of investors to do business with it. BSE is well aware that the challenge is formidable not just because it will have to locks horns with the well-entrenched NSE, but it will have to grapple with one more upstart – the MCX-SX, which is already into currency derivatives business and will enter the equities business later this year.

Hence, with such formidable challenges being posed by the existing and potential rivals, the exchange has seen hectic activity over the last one year. A new team of young, street-smart, tech-savvy, committed and experienced professionals has taken over the reins and these leaders are giving their best shot to move the BSE to a position of pre-eminence.

Spelling out the fundamentals behind the strategy, Madhu Kannan, MD & CEO of BSE, states, “Underlying the entire strategy are three key themes: first is technology, second is focus on innovation and third is the importance of the regulatory role BSE, as an institution, has to play in the financial intermediation space.”

But the billion-dollar question is: Will BSE be able to outsmart and outpace its old and new rivals? Will the new team succeed in catapulting BSE high enough to be able to challenge the leader? For this, we need to first understand why BSE, which was in fact the No. 1 stock exchange in the country till 1995, lost its position to the late entrant NSE. We need to look at BSE’s lapses that cost the exchange its leadership position. We need to look at the strategic initiatives being taken by the new leadership team to drive BSE’s growth to the next level. Since the history of BSE is the history of Indian stock market, we need to first look at BSE’s history to understand its future.

The Glorious Past
If one image defines the Indian stock market, it is BSE’s iconic Phiroze Jeejeebhoy Towers at Dalal Street, Mumbai. Like a Gulliver among the Lilliputs, the 28-storeyed building towers high above and dwarfs the five-six storeyed buildings in the area. In a metaphorical way, the skyscraper signifies the heights reached by the Bombay Stock Exchange during the course of its chequered history of 135 years.

The Bombay Stock Exchange’s location at Dalal Street is synonymous with Indian market, just like Wall Street is synonymous with the US stock market and Threadneedle Street is synonymous with British stock market. But this was not always so.

The beginnings of the stock exchange were literally commonplace, with the stock brokers in the 1850s initially holding their meetings under the banyan trees in front of the Town Hall (now Asiatic Society) at Horniman Circle. [PAGE BREAK]

Thereafter, as the number of brokers kept increasing, they kept shifting their venues till finally in 1874 they found a place of their own and which was aptly called “Dalal Street” (Brokers’ Street).In its heydays, BSE was the largest stock exchange in India and it ruled the roost commanding a lion’s share of the Indian stock market business. The market those days was crowded with 20-odd other regional stock exchanges spread across the length and breadth of the country, but BSE was the Big Boss of them all – the mover and shaker of the Indian market.

BSE iconic tower came up in the ’70s and the adjunct Rotunda building became the venue of trading. The hallowed walls and portals of the trading hall bear witness to the hectic activity and frantic calls of the bears and bulls when stocks were traded on the floor of the exchange. Those were the days when terms such as “badla”, “undha badla”, “teji”, “mandi” were flew thick and fast routinely inside and outside the trading hall. The trading hall itself was so large that while inaugurating the BSE’s BOLT trading system in 1995, the then US Commerce Secretary Ron Brown had commented, albeit with a touch of exaggeration, thus, “I am told that during trading hours, it takes about half-an-hour to reach from one end of the trading floor to the other!” But today, with online trading becoming the order of the day, a deafening silence has engulfed the once lively and tumultuous walls and portals of the trading hall of BSE. No more can one see and hear the high-pitched calls and counter-calls and fervent and passionate gestures of the jobbers and brokers on the trading floor. These images are now consigned to the dustbins of history.

Today, the silence of the RAMs has drowned out the shrill outcries of the market operators. The silent strokes of the keyboard unfold the high drama in front of the trading terminals, who stare at the operators sans motion or emotion.

The Lapses & The Decline
But times change and, with the times, fortunes change too. The onset of online trading with the entry of Over The Counter Exchange of India (OTCEI) in 1992 and NSE in November 1994 changed the face of the capital market and radically changed the way the market players did business on the bourses. For the BSE, online trading was literally a bolt from the blue. Despite OTCEI introducing online trading in 1992 for scrips of small and mid-sized companies, BSE continued to drag its feet on computerisation and persisted with its old and outdated open outcry system of trading.[PAGE BREAK]

The opposition of its member-brokers and jobbers to online trading impeded BSE’s transformation into a modern exchange with state-of-the-art systems and processes. This gave the then upstart NSE the crucial lead to forge ahead at a rapid pace, establishing pan-India footprint with its ever-growing network of VSATs. The seemingly invincible and infallible BSE had suddenly become vulnerable in the face of the NSE’s cyberspace onslaught. NSE’s exponential growth in business jolted the BSE out of its stupor and within just four months of NSE’s online system becoming operational, BSE went live with its own BOLT system in March 1995.

It was a lesson learnt for the BSE, but at a huge cost and BSE has not been able to recover from the setback till date. This fact was evident that the NSE overtook BSE in the cash segment turn- over within one year of its becoming operational and BSE still lags behind NSE in the cash segment by a wide margin, while in the F&O segment, NSE enjoys a virtual monopoly today. In FY2009-10, NSE’s cash segment turnover at Rs 41,38,024 crore exceed-ed BSE’s turnover at Rs 13,78,809 crore by over three times, while BSE’s derivatives turnover at Rs 234 crore pales into insignificance compared to NSE’s turnover at Rs 176,63,664 crore in FY2009-10. BSE also lags behind NSE in income and profitability. For FY2008-09, BSE’s income from operations was Rs 421.09 crore and PAT was Rs 212.18 crore, while NSE’s income from operations was Rs 1024.27 crore while its PAT was Rs 515.54 crore.

The Initiatives
The huge gap in the volume of businesses of the two exchanges clearly underlines the Herculean task that lie ahead for the new management team at BSE. Having identified its weak spots, BSE has moved to address the issues and has already launched several initiatives to drive the growth of its businesses. [PAGE BREAK]

The exchange has adopted multi-pronged strategies in several key areas to enhance its reach across the country, expand its product portfolio, open up new streams of revenues with new product launches and forays into new businesses and drive volumes in its existing and new businesses.

“Getting more memberships, pro-viding cost-effective access, better technology, more products and reducing intermediation costs along the entire cycle is the core driver of the BSE strategy,” explains Kannan. Let’s look at each of the strategic initiatives to understand how these initiatives are expected to take BSE into a higher trajectory of growth.

Professional Thrust
The demutualisation and corporatisation of the stock exchange was completed in 2005 and as a result, the management-by-members setup was disbanded to give way to professional management. The exchange has a new team in place headed by Kannan.

Many top-notch and highly experienced professionals have been roped in to enhance management bandwidth and leverage their highly specialized domain knowledge and professional expertise to provide the necessary all-round thrust to BSE’s growth engine. “We have a very strong professional leadership team who have joined the institution because of the challenge and who have a unique opportunity to turn it around and create a solid institution,” declares Kannan.

Inhouse Technology
DriveIn 2009, BSE purchased Marketplace Technologies, a market technology company, which has enhanced its in-house technology development capabilities. “We acquired Marketplace Technologies which gave the exchange for the first time direct control to determine some of our technology strategy inhouse.

In Marketplace we not only got strong inhouse technology development capability but we also got some of the senior leadership of the firm including Ashish. So Marketplace got us into order routing space which is important especially in market like India where there is significant retail participation,” says Kannan. Marketplace acquisition has also enabled BSE to clock faster time-to-market for new products. [PAGE BREAK]

In November last year, it introduced ‘Fastrade’, a market access platform for faster execution of trades. “New factors are coming into the market such as high frequency trading, algorithm-based trading, and so on, so your technology needs to change and the way you operate needs to change. Deutsche Boerse is also helping us fine-tune our product strategies in variety of areas including third party warrants, delivery-based derivatives, bond trading and bond derivatives,” informs Ashishkumar Chauhan, Dy CEO, BSE.“

The entire mutual fund platform was conceptualized, designed, developed, tested and launched by our internal team in record time and we are doing exceptionally well in terms of market share of the order flows coming in through the exchange’s MF platform,” says Kannan.

The revamp of BSE’s website bseindia.com was aimed at making it more user-friendly and increase its utility value for the investors through interactivity. The revamp saw wide range of new features being added such as ‘Live streaming quotes for Sensex companies’, ‘Advanced Stock Reach’, ‘Sensex View’, ‘Market Galaxy’, and ‘Members’ as also launch of BSE websites in Gujarati, Hindi and Marathi in order to increase its reach to retail investors who are not conversant or comfortable with English. It will soon launch live steaming quotes of Sensex companies for mobile phones. “We need to make path-breaking innova-tions and so we are investing significantly in technology,” says Kannan.

The Collaborative Approach
BSE’s tie-ups with other exchanges such as Deutsche Boerse and Singapore Stock Exchange is expected to benefit the exchange through the launch of innovative products and cross-border business. Through this partnership, BSE has offered Indian companies listed on BSE listing on Deutsche Boerse, while European companies can list on the BSE. This will help Indian compa-nies expand their presence and investor interest in Europe, while European companies can expand their presence and investor base in India.

The BSE has also joined hands with several banks and financial institutions to establish the United Stock Exchange (USE) for currency derivatives. BSE has taken up 15 per cent stake in the USE. “We have used the consortium model to get an entry into the currency derivatives space by allowing this consortium the leverage of our technology, distribution network and assets. We have also got wide range of market participants, primarily the banks to come in as shareholders with a commitment to build this marketplace, in addition to couple of large trading shops, including Bank of America, JP Capital, etc. [PAGE BREAK]

We hope to go live in USE very soon and we are very confident that it’s going to be premier currency derivatives platform in the country,” says Kannan.

Membership Drive
BSE membership has been historically concentrated in the western states of Maharashtra and Gujarat. In order to expand it membership to the other parts of India, BSE has recently slashed its membership fee to Rs 10 lakh to attract members from all parts of India as also to attract small brokers and corporate entities which have till now remained deprived of membership due to the steep fee structure. The increase in membership is expected to bring in more business to the exchange, thereby increasing its revenues and profit. “We have changed the way in which BSE’s membership structure has been organized and we are trying to get as many members as possible to participate in our markets. So we have recently made a significant change of reducing the entry cost by almost 90 per cent. The response has been spectacular, with more than 1500 conversations going on at various stages and 400-odd applications already coming in,” informs Kannan.

“The exchange is very focused on expanding access to our trading platforms by increasing the number of members - especially nationwide. Through our partnerships with our strategic investors we also see great potential in raising awareness of the BSE in foreign markets and bring more foreign participants into the market,” says James E. Shapiro, Head - Market Development.

Products & Pricing Strategy
BSE is making foray into currency and interest rate derivatives through its alliance with the USE. BSE has also launched ‘BSE StAR MF, the platform for mutual fund trading which enables members of the exchange to use BSE’s existing infrastructure for transaction in mutual fund schemes. It proposes to launch live streaming quotes of Sensex companies for mobile phones, giving the investors the advantage to check the rates real time and profit from the information. “We are working on providing access to the market through the mobile, which is going to be a game-changer. Today, there are around 15 mn depository accounts, but there are 600 mn cellphone accounts,” informs Kannan.“If you look at the Indian market, there are a whole range of products waiting to be developed. We are talking about equities, derivatives, interest rates, currencies, exchange traded funds, third party warrants, structured products. We sense an opportunity and are very excited about the potential for the development of the market. We will do some products directly, and some in partnerships with others,” says Dr Sayee Srinivasan, Head, Product Development, BSE. BSE is also gearing up to meet the competition through innovative pricing strategies. [PAGE BREAK]

“We’ve looked at various innovations in terms of pricing. We introduced for the first time in the country ‘make-or-take’ pricing strategies where the cost of placing an order which creates liquidity in the system is much lower compared to those that take away liquidity,” informs Kannan.

BSE’s new transaction fee structure for cash equity segment was unveiled in the last quarter of 2009 and slashed the derivative rates with a view to reduce transaction costs for the intermediaries and market players. This was aimed at pushing volumes in both cash and derivative segments. “At one end of the spectrum, we are developing financial products and platform capabilities to accommodate the next generation of market participants - sophisticated algorithmic traders who will infuse liquidity in the markets. Equally exciting is the opportunity at the other end of the spectrum where we are combining an aggressive pricing strategy with accessible mobile technology to bring India’s markets to folks who have been excluded from it thus far,” says Rahul Parulekar, Chief Business Officer & Head of Markets, BSE.

Advantage BSE
BSE has several advantages which it has inherited over the years and which it can exploit to steal a march over its rivals. Firstly, it has the popular benchmark index, the Sensex. Not only do the retail investors and market participants track the Sensex on a daily basis, it is also, as BSE puts it, “the BSE index the world tracks”. This is a huge advantage which the BSE can capitalize on to build up its business.

Secondly, BSE is the No.1 stock exchange in the world in terms of the number of companies listed (over 4,900), while NSE’s tally of less than 1,500 listed companies is not even a third of BSE.

“BSE’s entry norms for listing are objective based criteria with emphasis on adequate disclosures for the investors to take informed decisions. BSE has expressed its interest in introducing the SME platform and being the largest nursery of small and medium cap companies on the main board,” says Nehal Vora, Head - Planning & Policy. Most importantly, the mindset of the BSE has changed quite a lot after demutualisation and corporatisation happened. It is no longer a private club-like organisation managed by broker-members. Over the last five years, it has metamorphosed into a truly professional organisation run and man-aged by new-age young, qualified and experienced professionals. [PAGE BREAK]

The Future
The initiatives taken by BSE during the last one year are commendable, but it remains to be seen whether or not these initiatives produce the desired results. The BSE management is confident of pulling it off and although it may not be anywhere close to staging a coup and deposing the NSE from its top perch, it would have achieved a lot if it manages to recover the lost ground and get within a striking distance of the NSE. The jury is still out and we’ll have to wait and watch till such time we know the outcome of the new initiatives.