Volatile equity markets as well as falling cash market volumes is making Indian stock exchanges reinvent the wheel. While some are increasingly looking at non-trading revenues to boost its profits, others are scaling-up. ?Our overall gameplan is to diversify operations across asset classes and product lines? says James shapiro, head market development at Bombay Stock Exchange. Globally, the most profitable exchanges such as Deutsche Borse group, CME (Chicago Mercantile Exchange) group, Hong Kong Stock Exchange or NYSE Euronext have diversified their operations both geographically, across asset classes and products, according to market experts.

While the overall equity volumes among Indian exchanges increased 46% to R339 lakh crore in the financial year 2010-11, it was led by low-margin derivative trades, which comprised 86% of overall turnover. Exchanges get to charge only about R2 per lakh of derivative trade as against R3.5 for cash trades.

Listing, market data, corporate information services, clearing and settlement, interest income are the other source of revenues for a stock exchange. NSE recently extended its product line by launching 91 day T-bill futures. It is also planning to launch futures and options on S&P 500 and Dow Jones Industrial Average. It is also pushing the envelope for building retail debt volumes given the large appetite for fixed income investments.

BSE is planning to earn more from mutual fund trades, corporate services and allied trading activities. BSE earns about 42% of its revenues from listing and trading related activities, while it is 74% for NSE.

?Exchange costs are fixed in nature, and once it is covered, all revenues after deducting marginal costs goes straight into the bottomline? said an exchange official. Be it the planned merger of NYSE Euronext with Deutsche Borse or failed attempt by Singapore stock exchange and London stock exchange to take over Australian stock exchange and Toronto stock exchange, respectively, the attempt has been to achieve scale and reduce operational costs, reasons Chitra Ramakrishna, joint MD at NSE. ?Exchanges should get into multi asset classes as long as customers want it? says Joseph Massey, MD and CEO of MCX-SX. ?All under one roof is the new business mantra? he says.

While MCX-SX is looking to enter the Indian equity exchange business (currently under litigation), its promoters, Financial Technologies and MCX, are already a market leader in commodity as well as currency exchanges. It is also one of the few groups to have ventured abroad with exchange operations in Singapore as well as in Africa and West Asia

Indian stock exchanges have been affected by lack of cash market volumes over the past few years. ?If equity cash volumes in early 90s are adjusted for inflation, it would be the same at current prices? says Massey.

Most traders have moved away from cash in favour of derivatives due to lower STT and cash-based settlement system. While the above trend hasn’t affected NSE revenues since it has a near 100% market share in derivatives, the profitability of BSE has been hit. BSE net profit was down 12% to R186 crore for 2010-11 while NSE profit figures are not yet on the public domain.

While market experts argue that stock exchange revenues will continue to be affected by equity market sentiments, they believe that diversification could cushion the fall. Though currency and debt exchange businesses are currently yielding a zilch, commodities are generating decent revenues. ?Clearing and settlement business of Central Depository Services Limited, in which we increased our stake last year, is a stickier as well as high-margin business? said shapiro. As per data compiled by FE, Deutsche Borse group is the most profitable exchange in the world with $977 million in net profit followed closely by CME group ($ 951 million), BM&F Bovespa ($ 651 million) and Hong Kong Stock Exchange ($ 648 million).

Indian stock exchanges though not in the top ten league, certainly tops in terms of net profit margins. In dollar terms, NSE has reported higher profits than that of Nasdaq OMX group, CBOE holdings and Luxembourg Stock exchange. ?Our high margins are a result of lower employee and software costs than that in developed markets? said a senior exchange official.