The MCX-SX, a newly floated stock exchange by Financial Technologies is all set to commence operations in a sector that is currently dominated by the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). In an exclusive interview with Akash Joshi and Bijith R of The Financial Express, Joseph Massey, MD & CEO, MCX-SX speaks about the challenges, potential opportunities and their strategies to make it a a global exchange.
The MCX-SX will be the third stock exchange in India to offer equity and derivative trading. How will it differ from existing exchanges like the BSE or the NSE and how challenging it will be for you to establish the exchange?
The MCX-SX comes at a point when financial inclusion has become a national challenge and various committees on financial markets like the Percy Mistry Report or the C Rangarajan Committee, have stressed the need for expanding and deepening the market. However, institutions currently present were not able to reach that level and and our entry is coincident with three or four structural changes. The first change that took place was the intervention of technology.
Till recently, what was considered to be state-of-art technology was online trading which reached out to 15 million investors. But now the cutting edge is mobile trading. We have 400 million mobile subscribers and another 400 million bank-account holders. This is the journey that we have to travel from where we are now. Secondly, institutions like banks which penetrated deeper into the market are expected to become providers of financial services and all 400 million deposit holders will have access to the capital markets through these banking channels. This is going to set off more changes in the system and we need to have many more institutions to grapple with this quantum leap in growth. Thirdly, when radical changes are happening as part of policy, like making Mumbai an international financial hub, we need to have more institutions where each one will find its own niche to turn these missions into reality. And history tells us that in sectors with a large number of participants like telecom and aviation among others, the growth has been substantial.
But unlike other sectors, liquidity is the primary factor that decides the success or failure of a stock exchange, and this is difficult to poach. So how are you planning to ensure this?
Currently, about 95% of the trading happens only in the top 100 stocks out of the total 7,000 listed. So if liquidity is the yardstick, then there is a collective failure. So when we talk about inclusive growth, these challenges will have to take care of the 7,000 companies and also the potential 75,000 companies who will come to the market directly or indirectly. While we acknowledge that liquidity is a challenge, it is already present in existing institutions.
Globally, it has been found that as the base of users in retail or institutions increases, liquidity starts pouring in. With liquidity as the yard stick in the commodities market, we were ranked zero when we entered that sector in 2003. But with technological innovation and new strategies, we managed to create liquidity comparable to global levels and we are now ranked among the top seven exchanges in the world. So it is not something which is impossible. Liquidity comes when multiple institutions enter and experiment with innovation in their own space.
What is your strategy ? will it be product-oriented or technology-based?
Running an exchange is like running an orchestra where all the arms have to work simultaneously to get the desired result. Having created a market from scratch, where the constituents were technologically and financially illiterate, to a world-class institution, our learning has been immense. We have got 2,000 members at MCX. When we started the currency exchange, around 1,000 people applied for membership. Hence we already have a constituency ready to start trading with us and they were our first movers. And the domain knowledge and technology, which is our core strength locally and globally has been appreciated by participants. We are happy that we were able to understand the end-user better and translate their requirements much better.
How will you convince companies, which are already listed on the BSE and the NSE? Will you be targeting the companies from the large-cap segment?
When the NSE started operation, there were some companies who supported the body and started trading on it. Their success encouraged many more companies to come aboard. Now there are around 7,000 companies on the BSE and around 1,500 companies on the NSE. Since we believe in the theme of inclusive growth, denying entry would be wrong. However what we need to do, is to bring life in to those companies in terms of trading. Globally such models are available. So we have a definite strategy to handle illiquid and liquid scrips and ensure that trading is generated because there is better way of handling those scrips.
Transaction fees forms one of the major sources of revenue for a stock exchange. Would you set it at competitive rates as compared to fees at the NSE and the BSE?
When the currency exchange started, both the NSE and the MCX-SX didn’t charge and the result is that both of us have a nearly 50% marketshare. When we start the equity exchange, we will have to revisit this hypothesis. The NSE charges some amount of money and given their cost structure there is a minimum that they have to charge. Being a new generation exchange with cutting-edge technology and lesser legacy, it will be a change from what we are witnessing today. We would see the most efficient format of pricing that could be brought out and any innovations in pricing will be implemented.