MCX-SX's entry into equities trading was expected to hurt BSE the most, since BSE has always been a distant number two once NSE overtook it in the mid-90s.
MCX-SX's entry into equities trading was expected to hurt BSE the most, since BSE has always been a distant number two once NSE overtook it in the mid-90s. While most industry players were skeptical of MCX-SX’s claim of expanding the market, they felt it would not be difficult snatching market share from BSE. But little over a week into its operations, MCX-SX may have realised that eating BSE’s lunch may not be that easy; brokers do not easily switch loyalties between exchanges unless they have a good reason to.
Daily traded turnover in MCX-SX’s cash and derivative segment combined has ranged between Rs 7-20 crore. That explains the bourse’s hastiness in announcing a 'Liquidity Enhancement Scheme' in the cash and equity derivative segments as it tries to woo brokers to trade on its platform. Under the scheme, brokers and investors who put their trades through MCX-SX’s equity platform will get a commission for the turnover they contribute.
According to a MCX-SX media release, incentives provided for cash market trades will offset around 64 percent of the Securities Transaction Tax (STT) charges, and those for stock futures trades will offset around 37 percent of STT. On passive orders (to buy or to sell at a price below or above prevailing market price), investors will get a full waiver on transaction costs and an additional incentive that equals 50 percent of transaction costs.
MCX-SX may take pride in being the "first exchange to offer incentives for liquidity enhancement in equity cash market." But the bourse is merely following the footsteps of BSE, which is desperately trying to boost its equity derivative turnover by offering incentives to brokers and traders under its Liquidity Enhancement Incentive Programme. The LEIP is now in its ninth season, having got yet another extension.
And while BSE may have managed to boost turnover in its derivative segment, the true test will be when the incentive scheme is withdrawn.
Since September 2011 when BSE first introduced the scheme, the bourse has paid out around Rs 116 crore by way of incentives to its members. In put that number in context, BSE's net profit for the half year ended September 2012 was about Rs 34 crore. And while derivatives turnover may have surged, it is still not contributing to the operating income, which has been stagnant for the past many quarters now.
Also, the surge in traded turnover in the derivative segment has not been consistent. For instance, turnover climbed to 9.78 lakh crore in July 2012, fell to Rs 2.97 lakh crore two months later and again rose to Rs 9.23 lakh crore in January. Also, statistics on the payout to market makers published by the BSE show a high degree of concentration.
For instance, the top two market makers accounted for nearly 60 percent (Rs 3.73 crore) of the Rs 6.38 crore paid out as incentives last month.
Also, a change in one of the rules last week following a Sebi directive could make matters difficult for market makers. Sebi has instructed exchanges not to pay any incentive on trades where the buyer and the seller is the same party.
MCX-SX may not have had any option other than to incentivize brokers/investors to trade on its equity platform. But if BSE's experience is any indication, it will have to be prepared to dig in for the long haul and to also burn a good deal of cash.