In 2009, MCX Stock Exchange (MCX-SX) ?informed? the Competition Commission of India (CCI) that the National Stock Exchange of India (NSE) was acting anti-competitively in the nascent market for currency derivatives. Both NSE and MCX-SX provide platforms for trading instruments such as US Dollar-Indian Rupee currency futures of different maturities. MCX-SX essentially complained that NSE was using predatory pricing to drive its competitor out of the market, using its dominant overall position in providing trading platforms for financial instruments (especially equities), and resulting deep pockets.
The CCI ruled heavily in favour of the ?informant? and levied a penalty of over R500 million on NSE. There was a minority dissenting opinion, as well as an even harsher assessment against NSE in the initial investigation by CCI?s Office of the Director General (DG). Anyone who reads the various reports will see that the attempted use of economic analysis is at a much higher level than in the old days of the Monopolies and Restrictive Trade Practices (MRTP) Commission. There is even considerable discussion of newer concepts such as network effects and their relation to liquidity creation. However, the end result is discouraging. The CCI ruling will likely lead to less competition and higher costs for customers. The core of the analysis relies on a knee-jerk reaction to ?dominance? that is not dissimilar to the old MRTP approach. There are also critical problems with CCI?s approach to defining the relevant market, and to measuring market power.
The DG?s investigation provided a very confused discussion of market definition, ultimately going with one that makes no sense. It included all exchange-trading services for financial instruments, based on some notion that these could be?and are?provided by the same suppliers, and could be?and are?purchased by the same demanders. This makes no sense, and was rejected by CCI?s own members. The CCI order, therefore, considered the market as being for currency derivatives?but only those traded on the domestic exchanges, and not the much bigger offshore over-the-counter (OTC) markets. Even the dissenting minority accepted this argument, based on legal restrictions on who can trade in the two arenas, as well as on the size and nature of trades. This, however, completely neglects the possibility that those who currently trade offshore or OTC could be attracted to the new domestic exchanges?if the terms were made attractive. If the larger market for currency derivatives had been considered, there would have been no basis for the ruling as it was made.
Using the narrow market definition, CCI then decided that NSE, by waiving transaction and membership fees, was forcing MCX-SX to match these zero prices, and incur losses that it could not sustain as long as the deep-pocketed NSE. CCI ruled that NSE was trying to drive MCX-SX out of the market, reducing long-run competition. But even with the (incorrect in my view) narrow market definition, the ruling completely distorted the facts, something brought out systematically in the minority dissent.
Indeed, NSE started out by waiving fees, for a market that was truly brand new for India, and when MCX-SX entered, it was forced to match. The zero fees continued as the market grew, and CCI claimed that the market was no longer nascent. Again, given the domestic growth potential and the large offshore trading volumes, this claim makes no sense. Furthermore, MCX-SX overtook NSE in market share after entering second. Even more contradictory of a claim of dominance and predation, a third entrant made a recent successful foray into this market, with a third trading platform. This entrant is United Stock Exchange, backed by a consortium of banks, themselves with deep pockets. NSE has continuously been losing market share in trading currency derivatives, and its greater market share in other segments of trading for financial instruments is of little relevance, though it was used in the CCI ruling to conclude that NSE was dominant and must be abusing that position.
There were other facets of the case, other nuances in the arguments, and some detailed economic analysis and legal precedents marshalled by both sides. Often, there were flaws and inconsistencies in the analysis on all sides. NSE certainly did not come out of the process as seeming perfect or pure in all its actions. But the simple logic of the case seems to me to be that NSE does not dominate the broad market for currency derivatives. There are three domestic competitors, each with roughly equal shares of the small domestic exchange-traded segment, and each with potential to grow and capture global market share. There was no evidence that NSE was driving out competitors?quite the opposite. This point was the basis of the minority dissent. All that the CCI ruling does is stunt domestic competition, favour one competitor, and raises prices for customers. That is not good economics or good interpretation of the law.
The author is professor of economics, University of California, Santa Cruz