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India's stock exchanges are no longer standalone trading engines. They provide solutions to everything related to the stock market business.
However, the key challenge for the Indian stock exchange industry lies in increasing penetration and attracting more retail investors, and this is yet to happen.
Spurred by competition, Indian stock exchanges have emerged as end-to-end solution providers by integration of trading in asset classes apart from equities, consolidation of clearing settlement, depository, risk management and technology business.
Earlier, regulators had insisted on keeping the main trading activity segregated from ancillary business and generally opposed any mergers and acquisitions and alliances.
Now, "vertical integration of trading, risk management, clearing and settlement functions under one umbrella would be the favoured structure. Clearing and settlement of OTC trades would move to CCPs (central counter parties)," according to the National Stock Exchange (NSE), a leader in equity trading.
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Madhu Kannan, the CEO and managing director of the Bombay Stock Exchange (BSE), also believes the future lies in integration.
"Technological, distribution-related, innovative (product, processes and technology) and competitive issues will dominate the next decade in the Indian capital markets," he says.
While NSE increased its stake in National Depository Services Ltd. to 26 per cent, BSE now controls the Central Depository and Services Ltd (CDSL) through a 51 per cent stake.
In the technology space, while NSE owns 26 per cent of software vendor Omnesys Technologies, BSE acquired 100 per cent ownership of Market Place Technologies, a back office solution provider.
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NSE set up its own platform for currency trading and BSE picked up a 15 per cent stake in United Stock Exchange, which trades only in currency.
Both exchanges have set up their own clearing and settlement arms and inked exclusive global alliances with leading exchanges in the US, Europe and Asia.
Until now, over 80 per cent of BSE and NSE's revenues came from trading charges, but both exchanges will seek to change their revenue mix.
"While the trading business will grow, clearing and settlement, depository, listing and technology business will add significantly to the exchange's revenue," said Ashish Chauhan, BSE's deputy CEO.
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Key Challenges
However, the participation by investors in the domestic capital market is a mere 1.7 per cent of the population, against 15 per cent in China and 30-40 per cent in developed countries.
Furthermore, in the past few years retail investors have actually been exiting the market.
"The evolution of the Indian stock exchange industry has been quite skewed in term of products, participants and geography," said Joseph Massey, managing director of MCX SX.
MCX has been fighting it out in the courts to gain a licence to operate a full-scale equity exchange on the lines of BSE and NSE.
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Massey is of the view that since 1990, sectors like banking, insurance, telecom and aviation grew exponentially, but the stock exchange industry has gone nowhere.
"Future product differentiation and competition between exchanges will be in the areas of technology, service, support facilities, global competitiveness, product innovation and clearing differentiation," said Massey.
There is also the challenge posed by the recommendations of the Bimal Jalan Committee, tasked with suggesting a road map for market infrastructure institutions. These could reduce competition among stock exchanges.
The report says only banks, insurance companies and domestic financial institutions - which fall under the category of public financial institutions - with a net worth of Rs 1,000 crore (Rs 10 billion) can be roped in as anchor investors.
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They can hold 24 per cent stake in an exchange, with a clause to reduce this to 15 per cent in 10 years. All others can hold a maximum of 5 per cent. The committee has also suggested keeping stock exchanges' profits under strict oversight.
It opposed the listing of stock exchanges. This will hurt the exchanges, as they could loose marquee shareholders.
These recommendations are unlikely to be implemented in their original form, but exchanges will have to change the way they do business and plan to grow.
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Impact of Global Alliances
NSE will be able to offer a basket of top traded global indices once the FTSE 100 index is listed on its floor in India.
The idea is to allow Indian investors to take positions in every leading world market at a low cost.
NSE already has a licence to list the Dow Jones Industrial Average and S&P 500 through its alliance with the Chicago Mercantile Exchange (CME) and the process of listing them in rupee-denominated contracts is on.
BSE has tied up with the Deutsche Boerse Group, a strategic investor in it, to explore cross-listing of indices and other products.
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"While NSE will have an edge due to its dominant position in derivatives at home, the cross-listing of indices in the US and Europe, the world's largest derivatives hubs, will change the market dynamics," said an analyst.
In the US, the Nifty is traded on CME Globex, the most widely-distributed electronic trading platform in the world. It is the largest hub for derivatives in the US and the second largest globally.
This will help NSE increase its reach, as the CME Group has ties with Brazil's Bolsa de Mercadorias & Futuros, Bovespa, Bursa Malaysia, Dubai Mercantile Exchange, KRX Exchange of Korea, Paris Bourse SBF SA, Montreal Exchange, Spain's MEFF and SGX (Singapore Stock Exchange).
Interestingly, the BSE's benchmark index, Sensex, will have a greater reach in Europe, once trading in the index picks up. The derivatives exchange market there is dominated by Eurex, controlled by German operator Deutsche Boerse and SIX, the Swiss Exchange.
Also, Sensex could have an edge once the merger of Deutsche Borse and NYSE is completed. Also, BSE's recent tie-up with Osaka Stock Exchange will help it trade in water and other commodity indices.
