Friendly exchange

Listing of trading platforms will open up their operations to scrutiny and set the stage to phase out their regulatory role

By Mohan Sule

A crucial component to attract investors is sanctity of the market. The term is open ended. It can mean different things to different people. Symmetrical dissemination of information and severe punishment to those violating their trust might provide comfort to the small investors. Institutional investors might want an end to the discount in the pricing of IPOs to the retail investors and smooth settlement process. Easing of norms for installing co-location servers for the split-second advantage in the trading ring might be a cause of delight for traders. Issuers might list liquidity and a crackdown on mischief makers spreading rumours to hammer down stocks. The bottom line is that though there is a consensus that the market must be fair and transparent, there are varying shades of opinion on what it means and how to achieve the objective. There is growing exasperation among companies with stock exchanges seeking clarification on every news report. Small investors complain about the preferential treatment given to select analysts by some companies. Big investors fret about tightening of lock-in on exits from IPOs, private placement and preferential allotment. In short, despite the best efforts by stock exchanges and the regulator, there is no unanimity among the players on whether enough has been done or more measures are needed to ensure a level-playing field for all market participants. The other debatable point is who should undertake the exercise: the capital market watchdog or the stock exchanges. Both have overlapping authority. Both can seek explanations from companies for acts that might have an impact on their stock’s movement. One can eject a company for not following the listing agreement, while the other can bar a company from raising funds for indiscipline. The issue has assumed significance following the go-ahead by the Securities and Exchange Board of India to bourses offering equity trading to list.

The primary worry is the collateral damage if stock exchanges become profit-oriented. Many listed firms that have opted for institutional capital due to cost-effectiveness have had to concede to the opinions of these influential shareholders. These companies have to live quarter by quarter. Till now, stock exchanges might have had the luxury of taking a hit now and then without angry shareholders telling them to cut cost and put in more work to increase market share. Yet, at this point, there is enormous market to tap as India prepares to embark on a double-digit growth path. The mushrooming of start-ups opens the door to widen the universe of listed companies and thereby increase revenues. Setting up a state-of-the-art trading platform is expensive and support is required of outsiders with deep pockets. How long can these big-ticket investors sit idle without expecting to see return on their investments? Funding will promote better infrastructure and niche platforms for specialized companies. Well capitalized exchanges might bring down trading cost and benefit investors. A market-oriented approach will hopefully replace the current complacent attitude in solving members’ and investors’ problems. Presence of independent representation on the board might result in better regulatory compliance.

Then there is the question of conflict of interest. To be sure, Sebi has put in place restrictions of quality of shareholding and control to ensure that the operations are run professionally. Listing on own exchange has been barred. This is puzzling. World over, some of the biggest bourses are listed and are traded on their own platform without any doubts about regulatory advantage. Also, what happens if the NSE makes a bid for the BSE on which it might be listed? Nasdaq had wanted to take over the derivatives and cash business of the proposed NYSE Euronext Deutsche Borse, the attempt to amalgamate of two stock exchanges on two different continents that was blocked by the European Union despite winning approval from the US anti-trust regulator. In fact, the oversight by Sebi will make stock exchanges transparent about their revenue sources. How much of the income is generated from algo trades over small lots of ordinary investors? There will be an opportunity to showcase the firewalls in place to eschew any breaches. As such, trading platforms should be allowed to have a wider shareholder base without any restriction on M&As. Eventually, they should be looked upon as tech companies or e-commerce ventures offering a meeting place for buyers and sellers. Regulatory responsibilities should gradually pass on to the market watchdog, unburdening the exchanges of any monitoring role so as to enable them to function as organisations whose unique proposition is using technology to meet the demand of consumers efficiently and openly. Otherwise, they will be subject to bear hammering and hostile or friendly acquisition by bigger and better exchanges enjoying superior discounting.

March to the tune

Being part of the global economy, India’s central bank cannot afford to slow down its easy money policy

By Mohan Sule

It is not only policy makers and central bankers who are feeling boxed by the turmoil in world markets. Ordinary investors, too, are perplexed. Traditional rules of investing are being tested with every bout of volatility that the market undergoes. The wild swings in the market movements are becoming the rule rather than exceptions. The first area of confusion is if globalization is beneficial. Since the emergence of China as the manufacturing powerhouse late last century and the outsourcing boom since the beginning of the century, investors have been hearing of the advantages of how international supply chains are keeping costs low and brining in rays of sunshine to dark corners of the world. The clever label of emerging markets indicated the tremendous gains to be made. For instance, the size of the middle class in India riding on back-office servicing opportunities was supposed to be equal to the entire population of the US. There was talk of India recording double-digit growth as a norm, like China, at the turn of the last decade. The worry of policy makers was not what to do to cross the milestone but how to calibrate the incoming gush of foreign portfolio funds without fuelling inflation. Many other peers had imposed capital controls.

If September 2001 brought into open the dangers of global terrorism and triggered the ongoing World War III, the collapse of Lehman Brothers in September 2008 became the defining moment for financial markets. It ended the age of predictable bull runs and bear phases, of commodity cycles, of correlation of stock movements with the cost and supply of money. The first two global conflicts were essentially tug-of-wars in supremacy of manpower and artillery. Whoever had more boots on the ground and technological edge in the air emerged winner. There was legitimacy accorded to the victors sharing the spoils. The current warfare, in contrast, is not conventional. It is seamless without defined borders or enemy troops. Similarly, doubts have arisen about traditional economic theories. The drying up of credit in the US had ripple effects on the emerging markets. Despite the upside potential of India, foreign funds inflows slowed down. The conclusion: the promise of growth has to be fuelled by liquidity. Instead of belt-tightening to de-leverage, the US Federal Reserve loosened the supply of dollars and kept interest rates near zero to spur economic activity, dealing a blow to conventional wisdom. Cheap money was fuelled into stocks but not for consumption. The dollar, contrary to expectation, strengthened and flew to emerging markets. It has taken the US more than seven years to recover, notwithstanding the series of fiscal stimuli. In spite of the absence of barriers for easy movement of money, man power, goods and services within the region, there is no uniformity in the health of the different members of the euro. The implication is that even if cheap money is required to encourage risk-taking, the by-product can be asset bubbles. At home, the creation of disposable income through dole-outs under the guise of social programs aimed at the rural poor is blamed for the rising prices of vegetables and lentils as well as boosting sales of durables and non-durables.

China’s troubles and the fallout, however, are stark reminders that the proposition of de-coupling, with economies applying age-old medicines to treat local ailments, has not stood the test of the time. The second largest economy in the world depends on overseas orders to keep its factories running but relies on retail investors to keep the stock market surging. The currency has been devalued to remain competitive in the market place as unemployment will end the bull-run in equities. The casualty, however, is oil. Even after declining nearly 80% from the peak in 2008, oil-dependent economies such as India have not gained as exports, many to the Gulf region, are not rising in tandem. Thus, another age-old approach to investing lies tattered. The focus on exports can be rewarding as long as the destinations stay in good shape. The domestic market, too, cannot remain insulated from the chill as cheap imports in search of markets pose a danger to local manufacturing. Another corollary is that monetary policy cannot be tweaked in isolation. The Fed is widely expected not to raise rates in this calendar year after its maiden attempt in a decade following signs of domestic recovery due to slowdown and recession elsewhere. The Indian central bank’s dilemma is still more complex: the need is to increase interest rates to tame food inflation but, at the same time, keep them low so as not to turn off foreign investors and freeze industrial output. However, being a cog in the global economy means growth has to take priority over inflation so as not to lose the position as the only bright spot in the world.