The Bombay Stock Exchange: Reinventing itself to remain competitive in the Indian market

Written by Anshuman Jaswal || April 04 2017

The Bombay Stock Exchange (BSE) is the oldest stock exchange in Asia, having been founded in 1875. However, in recent years, it has become the number two equity exchange in India, after the National Stock Exchange (NSE).

In the last decade, the BSE has been trying to overcome the disadvantage it has in the Indian market through a series of efforts. It has modernized its trading platform and is considered one of the fastest Asian exchanges. It has also tried to update its product portfolio, with significant emphasis on catching up with the big lead that the NSE had in derivatives trading. The NSE had the advantage of being the more tech-savvy exchange in its early years, and was backed by the Government which gave it credibility while competing with the BSE.

There are three noteworthy developments with respect to the BSE that illustrate its competitive strategy in the Indian market. The first is the successful IPO it had in early 2017. It was oversubscribed 51 times and the stock listed at a 35% premium. Being traded actively makes the exchange more transparent and accountable to its shareholders. This was an area in which it probably trailed the NSE in the last couple of decades. Hence the BSE will benefit from the move. However, as the decline in its share price since February shows, it will not be easy going for the BSE. The NSE is much larger and has significantly better profit margins. Its share of both cash equity and equity derivatives segments is also much higher. So, the BSE will have to be on its toes to remain competitive and benefit from being listed.

The second development is the implementation of a variable pricing strategy from 3rd April 2017. Instead of charging a fixed price for trading, the exchange is now seeking to charge transaction fees on a per trade basis, with discounts for brokers that have large trading volumes. The intention is to encourage higher trading volumes among the larger brokers. However, as has been pointed out by some experts, a per trade price instead of bulk pricing could be detrimental for brokers and institutional traders that have smaller volumes. But the move would allow more flexibility to the exchange in the longer run, and it can use it to create different types of incentive and discount schemes targeted at specific customer segments in the future.

The third recent development relates to the expected entry of the BSE in the commodity trading segment. Its application was being processed by the erstwhile commodity regulator, FMC, before the latter was merged with the capital markets regulator, the Securities and Exchange Board of India (SEBI). The go-ahead for introducing a commodity trading segment from the SEBI is expected sometime in the next few months. On its part, the BSE has been quite aggressive and has readied and tested its trading platform. However, as in other areas, it will not be easy going for the BSE in the commodity trading segment because there are two entrenched exchanges, the MCX and the NCDEX, that control the market. In addition, the Reliance Group, a leading Indian conglomerate, is launching its own commodity exchanges named the Indian Commodity Exchange (ICEX). Hence, BSE will be faced with stiff competition once it enters the market for both the commodity cash and derivatives segments.

The BSE has been a bellwether exchange for the Indian economy and stock markets for a long time. It has been over-shadowed by the growth of the NSE in the last couple of decades, but its presence in the Indian market is important as it provides competition and choice to investors. However, as the various issues discussed above indicate, it is expected to operate in a highly competitive environment in which success is not always guaranteed, and can be quite difficult to come by.