Santosh Nair
moneycontrol.com
The impending entry of MCX-SX as the third stock exchange in the country could spell more cheer for brokers than investors/traders in the interim, as incumbents (National Stock Exchange & BSE) look to protect their market share, and the new entrant (MCX-SX) tries to get a foot in the door.
Multi Commeodity Exchange of India-promoted MCX-SX arrives on the scene at a time when both NSE and BSE are struggling to grow revenues from their core operations (despite mouth-watering profit margins), as trade turnover has dipped over the last couple of years because of unfavourable market conditions.
The number of brokers too has been declining, as many have closed shop, unable to cover their operating costs. The NSE claims to have 1405 members at present, and the BSE, 1383. A majority of the brokers have membership on both exchanges. And while there may not be any steep decline in the headline numbers, markets participants say the number of active brokers would be less than a couple of hundred.
Liquidity is the key to any exchange's fortune, and tends to feed on itself. Higher the liquidity, lower the impact cost (variation from the ideal transaction price) for the investor. MCX-SX's biggest challenge would be to convince broker members on the NSE and BSE to divert a part of their volumes to MCX-SX, by offering suitable incentives. And brokers can expect a counter offer from the BSE and NSE to stick with them.
Liquidity can be generated; sustaining it and getting to a critical mass is hard work, but not impossible. After all, NSE toppled BSE in less than a year of becoming operational in the mid-90s. Also, since September last year, traded turnover in the BSE's once comatose derivative segment has been rising steadily, thanks to the incentives offered to brokers. In one trading session this year in May, the turnover climbed to around Rs 57,000 crore, almost half the daily average turnover in the NSE's derivative segment. Still, it could be a while before BSE is able to achieve consistency.
But MCX-SX will also have to reckon with the BSE and NSE matching whatever incentives it comes up with to attract members, as both exchanges have sufficiently deep pockets.
Already, both exchanges have been steadily reducing member charges over the last couple years, having anticipated that a third exchange would become a reality at some point.
It is not yet clear what MCX-SX's strategy will be. The bourse lost Rs 30 crore in FY10, Rs 56 crore in FY11 and Rs 58 crore last year.
One way to develop a strong member base would be to offer a very low membership fee. But brokers don't mind paying a higher membership fee, if they are assured of better liquidity. That is why an NSE cash market membership costs Rs 50 lakh, compared to Rs 30 lakh on the BSE.
The margins in the stock exchange business are juicy; last year NSE reported a net profit margin of nearly 50%, and the BSE around 35%.
The only worry is that growth in core revenues has been sluggish because of falling trading volumes.
Average daily cash market volume on the NSE was down to Rs 11,289 crore in FY12, from nearly Rs 17,000 crore in FY10. Average daily turnover in the futures and option segment, however grew over 66% to Rs 1.25 lakh crore, but cash market is where the moolah for both exchanges as well as brokers is.
For the half year ended September 2011, NSE collected Rs 365 crore as transaction fees from brokers, almost unchanged year-on-year. Total half yearly revenues grew 21% to Rs 778 crore, driven mainly by a more than five-fold jump in interest income to Rs 161 crore.
For FY11 (FY12 numbers have not yet been reported), core revenues grew 4% to a shade below Rs 800 crore, and total revenues grew 9% to Rs 1378 crore.
The BSE has not fared any better. For FY12, total revenues grew 7% to Rs 578 crore, and net profit fell 11% to Rs 205 crore. The BSE website does not give the break-up, but for the past many quarters, the exchange has been earning a sizeable chunk of revenues from its bank deposits and other fixed income instruments.
With MCX-SX waiting in the wings, core revenues will continue to be under pressure, unless the broader market revives. For all its lure of juicy margins, the immediate challenge for MCX-SX will be to create a loyal base of members.
For now, shareholders of Financial Technologies and MCX appear to be rejoicing. Both firms own 5% each in MCX-SX.
The
Financial Technologies stock was up 5% to Rs 793.35, and the
MCX stock was up 1% at Rs 1166 after touching Rs 1212 earlier in the day.
