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Regional exchanges face extinction as volumes peter out

Savio G Pinto

With volumes on regional stock exchanges having already diminished substantially after the National Stock Exchange and the Bombay Stock Exchange extended their trading network nationwide, the rolling settlement regime coupled with the common settlement cycle may be the last nail in the coffin.

The effects are already being seen with turnovers on the Calcutta and Delhi stock exchanges, having fallen to Rs 2.23 billion and Rs 997 million Tuesday from a volume of Rs 20.49 billion and Rs 3.94 billion respectively on Budget day.

Until a few weeks back, the regional exchanges especially in Calcutta and Delhi provided the much-needed facility for big-ticket operators and arbitrageurs to shift positions on the last day of the settlements of the NSE and the BSE.

But with the introduction of a common settlement cycle, which starts on Monday and ends on Friday across all exchanges, it would now no longer be possible to continue carrying on a trading position by shifting it from one exchange to another.

The natural fallout of this would also be the end to the arbitraging business. Arbitraging essentially involved buying of a particular scrip on the exchange where it is cheaper (i.e. towards the end of the settlement period) and correspondingly selling the same quantity of the same scrip on the exchange where the price is higher (i.e. towards the beginning of the settlement period).

But with the end of the arbitraging business, the core activity of these exchanges would which would in turn make them redundant.

M G Damani , chairman and managing director, Central Depository Services (India) Ltd, said "With the decision of the Sebi to give forward trading the go by, regional exchanges will find it impossible to survive since the bulk of the trading was of a speculative nature. Further with the introduction of derivatives trading, the requirements in todays scenario can be met only by two exchanges i.e. the NSE and the BSE. The end of these exchanges is a foregone conclusion."

Since arbitrageurs and speculators are the two sides of the same coin, the inability of the speculators or operators to shift their positions would by default eliminate the need for arbitrageurs.

Against this background, the NSE and BSE, which have a broader distribution network and higher penetration level would able to attract the bulk of the traded volumes away from the regional exchanges due to their perceived professional stature.

Said Maulik Sharedalal, director, Kaji & Maulik Securities, "We were anyway an over-brokered market. These reforms would effectively make it difficult for exchanges that cannot provide liquidity and brokers that cannot provide value to survive."

Analysts point out that NSE would turn out to be the dominant exchange in future since end-customers would be driven more by exchanges than brokers and due to the fact that in the recent stock market crisis none of the issues that cropped up on the BSE, figured on the NSE because of its professional management.

However one factor which would stand to the advantage of the BSE is the broader breadth of scrips compared to NSE and its lower transaction costs.

The other important aspect, which would steer investors towards the NSE is Internet trading, with the exchange having taken the lead in this direction. Most of the large and visible brokers like ICICI Direct, Moneypore.com are having their trading platforms linked to the NSE because of its technologically superior and advanced systems.

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