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.