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Badla ban sounds death knell for regional bourses

Savio G Pinto

The decision by the Securities and Exchange Board of India to introduce compulsory rolling settlements and a common settlement cycle across all exchanges may sound the death knell for regional exchanges. With volumes on regional bourses having already diminished substantially after the NSE and the BSE extended their trading network nationwide, the rolling settlement regime coupled with the common settlement cycle may be the last nail in the coffin.

As of now the regional exchanges, especially those in Calcutta and Delhi, provided the facility for big-ticket operators and arbitrageurs to shift positions on the last day of the settlements on the NSE and the BSE.

With the introduction of a common settlement cycle, which starts on Monday and ends on Friday, all over the country and across all exchanges, it would now no longer be possible to continue carrying on a trading position by shifting it from one exchange to another.

The natural fallout of this would also be the end to the arbitraging business. Arbitraging essentially involved buying of a particular scrip on the exchange where it is cheaper (i.e. towards the end of the settlement period) and correspondingly selling the same quantity of the same scrip on the exchange where the price is higher (i.e. towards the beginning of the settlement period).

Since arbitrageurs and speculators are the two sides of the same coin, the inability of speculators or operators to shift their positions would by default eliminate the need for arbitrageurs.

Against this background, the NSE and BSE which have a broader distribution network and higher penetration level would be able to attract the bulk of the traded volumes away from the regional exchanges due to their perceived professional stature.

However, some analysts point out that NSE would turn out to be the dominant exchange since end-customers would be driven more by the exchanges. In the recent stock market crisis, none of the issues that cropped up on the BSE figured on the NSE because of the latter's professional management. However, factors, which would stand to the advantage of the BSE is the broader breadth of scrips as compared to the NSE and its lower transaction costs.

The other important aspect, which would steer investors towards the NSE is Internet trading. Most of the large brokers like ICICI Direct, Moneypore.com have their trading platforms linked to the NSE because of its technologically superior and advanced systems.

Said Maulik Sharedalal, director, Kaji & Maulik Securities: "We were anyway an overbrokered market. These reforms would effectively make it difficult for exchanges that cannot provide liquidity and brokers that cannot provide value to survive".

M G Damani, chairman and managing director, Central Depository Services (India) Ltd, said: "With the decision of Sebi to give forward trading the go-by, regional exchanges will find it impossible to survive since the bulk of the trading was of a speculative nature. Further, with the introduction of derivatives trading, the requirements in today's scenario can be met only by two exchanges -- the NSE and the BSE. The end of these exchanges is a foregone conclusion."

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