Third Exchange Goes Live, Setting Up Battle in India

MUMBAI â€" India’s newest stock exchange, the MCX Stock Exchange, started trading shares Monday with thin volumes, taking up a steep challenge to build liquidity and win market share against the dominant National Stock Exchange and the smaller and older exchange, BSE.

As of late Monday morning, the value of shares traded on the MCX-SX, as the new exchange is known, was 1.5 million rupees, or about $28,000, according to data on its Web site. That compared with trading volumes of 34.3 billion rupees on the NSE.

Financial industry players said time would tell whether the new exchange could make inroads in India.

“Earliest we can know whether MCX has made a mark in equities is five years from now,” said Phani Sekhar, a fund manager at Angel Broking.

Brokers are optimistic regarding the prospects for the MCX-SX, whose backers previously built one of the country’s top commodity exchanges, the Multi Commodity Exchange of India. Securities industry participants hope the new exchange will help push down trading costs and drive development of trading products.

Although trading volumes are expected to rise in line with the government’s goal of bringing more retail investors into stocks, Indian stock exchanges face a grueling battle for market share that observers say will essentially be a zero-sum game in the near term.

“MCX is known for product innovation, so only when they come up with truly meaningful innovations is when they would get successful,” Mr. Sekhar said.

Policy makers have long sought to bring more retail investors into stocks via mutual funds, which owned only 3.6 percent of the shares included in the broad BSE index last year, according to Citigroup data.

Gold and property are preferred by investors in India, where fewer than 5 in every 100 people buy equities either directly or through mutual funds, regulatory data show. By comparison, more than half of Americans own stocks, many through 401(k) pension plans, according to a Gallup estimate. In China, 86 percent of trading on domestic markets is carried out by retail investors.

MCX-SX will thus have to win market share at the expense of existing exchanges. The total value of share trading on the NSE was $526.1 billion last year, compared with $110.3 billion on the BSE, according to World Federation of Exchanges data.

Combined, that amounts to a quarter of the $2.6 trillion traded on the Shanghai Stock Exchange last year.

The entry of MCX-SX sets up a battle with NSE, itself once an upstart. After entering equity trading in 1994, NSE overtook BSE several years later, in large part by introducing new derivative products.

The competition is also colored by the acrimonious relationship between MCX-SX and NSE, which have frequently sparred publicly, especially over fees. Both already compete aggressively in currency futures.

Costs could be the first battle. Traders say MCX-SX’s structure lowers trading costs. NSE has countered by lowering membership fees for brokers under certain incentives.

The bigger battle could be waged in derivatives. The NSE has posted average daily turnover in this segment of 1.22 trillion rupees, or $22.8 billion, so far in the fiscal year ending in March, accounting for the bulk of its overall equities trading.

MCX-SX is focusing on that by offering to reduce settlement times in futures and options.

MCX-SX can benefit from the experience of its backers. One of its two controlling shareholders is MCX, the commodity exchange operator, and the other is Financial Technologies (India), which provides trading software for brokers.

Both the NSE and BSE are owned by domestic and foreign financial institutions, with Deutsche Börse and Singapore Exchange owning stakes in BSE and Citigroup, Goldman Sachs and Morgan Stanley owning stakes in the NSE.

After starting trading in 2003, MCX quickly overtook the National Commodity & Derivatives Exchange in trading of gold and metals, in large part by focusing on developing derivatives contracts.

“MCX’s strength has been business development, and they know how to create liquidity for new contracts,” said Gnanasekar Thiagarajan, a director at Commtrendz Research.

A version of this article appeared in print on February 12, 2013, in The International Herald Tribune.