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Smaller bourses face tough times

India's smaller stock exchanges face a grim future as authorities tighten regulations to snuff out unbridled speculation.

Beginning July, the market watchdog has shifted most actively traded shares to T+5 rolling settlement, ordered a uniform weekly trade cycle in less active counters and banned a unique century-old carry-forward facility.

This move followed a spate of scandals in March involving allegations of insider trading and price rigging, which sent the key stocks index plunging about 25 per cent over a six-week period and wiped out $47 billion in market capitalisation.

Analysts and brokers say the new rules will be another nail in the coffin for most exchanges.

"The smaller exchanges derive their existence from arbitrage and speculation...this move is a death blow for them," said Nilesh Mehta, vice-president at Calcutta-based Dalmia Securities.

Most of the 23 stock exchanges across India were already reeling under dwindling volumes as screen-based trading replaced the open-outcry system over the past 10 years.

The technology allowed India's two biggest bourses -- the National Stock Exchange and the 126-year-old Bombay Stock Exchange -- to offer their trading terminals across the nation, which cut into the business of local bourses.

The NSE has terminals in 417 cities and the BSE has terminals in 371 cities. The two exchanges account for around three-fourths of the nearly $500 billion annual trade volume.

Bread and butter

The smaller bourses thrived on arbitrageurs taking advantage of price differentials between exchanges and speculators who used to effectively get a cost-free five day option, since exchanges had a different fixed weekly settlement cycle.

The price differentials arise when speculators move their positions from one exchange to another to avoid taking delivery of shares, because of the different trading cycles followed by each exchange.

This boosts prices at the start of the settlement when speculators move into an exchange and lowers prices at the end when they exit.

The carry-forward facility was another driver of speculative activity. It enabled an investor to buy or sell shares by paying a small margin -- allowing him to take on bigger positions than he could otherwise afford.

"There is going to be a shake-out, a series of closures can be expected at local exchanges," said Mehta.

Innovate to survive

Some small exchanges are gearing up to stay afloat through innovative plans.

"We plan to start a short evening session to coincide with the Nasdaq opening, since the focus at our exchange is on software shares," said Jagdish Ahuja, president of the local bourse in Bangalore.

Some exchanges have set up companies which are members of the BSE or the NSE. These companies are partly owned by brokers of the local bourses, who then get access to BSE or NSE trade terminals -- without having to shell out huge fees individually.

Another bourse has struck upon another theme.

"We plan to give terminals to institutional investors who need not be our members," said Sudhir Joshi, president of the Delhi Stock Exchange.

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