Column : Trapped in the wrong equilibrium
India’s policymakers embarked on an array of reforms. Brokers were forced to unbundle the tariff charged to the customer from the transaction price on the floor. Trading was computerised. Counterparty guarantees came from the clearing corporation that produced safety by limiting leverage. Exchanges were put on a new governance model, featuring a three-way separation between trading members, managers and shareholders of the exchange. The ‘badla’ mechanism was eliminated in favour of derivatives trading.
What was the response of the industry? Mostly, sheer outrage. The firms and their CEOs were finely optimised for playing the old game. In the short run, the reforms disrupted revenues and profits. The BSE virulently protested, saying that market structure is best left to the market (even though no one CEO is able to shift away from the prevailing market structure). In the post-central-planning age of economic liberalisation, it was argued that this was a new level of government intrusion into the affairs of the market. A gifted senior executive director of
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