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The Exchange Wars

March 16, 2009
The competition between MCX and NSE will turn heat on the encumbent NSE after a long time, but it just sounds the war of exchange has finally set off

The competition between MCX and NSE will turn heat on the encumbent NSE after a long time, but it just sounds the war of exchange has finally set off

MCX Stock Exchange (MCX-SX) has applied to the Securities and Exchange Board of India, or Sebi, the capital market regulator, to offer trading in equities. If it wins approval, it would be the first greenfield equities exchange in India since the National Stock Exchange (NSE) started about 15 years ago.

The proposed new stock exchange would compete with NSE and the Bombay Stock Exchange (BSE). It would also be the first stock exchange with a common ownership and management in the post-demutualization era.

This is an extremely interesting piece of news which MCX has very well poised at the right areas, at the right time to lock a competition and take in the salvo.

The aim of MCX is to take equity and bond to the rural areas , which I believe is the best way to go forward. India has a huge base at the pyramid which is just waiting to be tapped. This being one reason why I am so overtly critical of a dot com startup. It doesn’t help solve Indian problems. I digress!But then, taking financial innovation to the masses is a huge step forward with a promise of a lasting growth.

Thinking of it, this will automatically increase the growth prospects of the national equity. Liquidity,Maturity and Volumes will be the direct outcome of it. But even more important is the promise of competition. Since the era of demutualisation has started, BSE had been entrenched in internal politics and has almost given NSE the entire advantage on a platter. While Sensex had the brand name of 133 years[technically less than that, Sensex term was coined somewhere in 70’s] but NSE has an advantage of supreme liquidity. And traders/investors/participants will always chase liquidity more than a brand name.

And thats precisely where MCX drives the nail deep. With a series of innovations, Jignesh Shah proposes to take away the edge away from NSE. Financial Innovations like interest rate derivatives, corporate bonds, equity trading and others will make NSE sit up and innovate thus resulting in advantage of users.

Initial, an even paper statistics reveals around 1crore demat accounts and the number of active client IDs is around 10 lakhs, so clearly investing is not a widely accepted phenomenon. Jignesh Shah, CEO of MCX INDIA proposes to “...will take equities, bonds to tehsil level

Clearly, this is an exciting prospect and MCX seems to be clearly edging towards the concept of ‘more’ financial innovation.

But what comes into fore is the apparent challenge of MCX to the near monopoly of NSE. Since the last 15years when NSE first started this is the first time it is facing the heat of competition in its own turf. Already the currency derivative segment of MCX has overtaken the entrenched player NCDEX by head and shoulders. So much so that, NCDEX was desperate to bring in participants , it slashed its rates inspite of SEBI directing it otherwise.

Apparently, FTIL, Finance Technologies the chief promoter of MCX India applied for equity/derivating trading last December and now its very likely SEBI nod comes anytime, FTIL is busy roping in another investor for this.

Given the huge magnanimous savings of Indian household roughly in tunes of $330billion, if we even see 10% of it flow to these exchanges, we might see a more even and mature Indian exchange, with perhaps a faster Capital Account Conversion happening than suspected before.

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