New jobs don?t begin more dramatically than this: Appointed CEO, BSE last week, Madhu Kannan started this one with circuit breaks and trading suspension at his exchange. Sensex is rising again, but BSE isn?t, and Kannan has a big job trying to revive Asia?s oldest stock exchange. BSE is losing market share to NSE. BSE vs NSE should be like NYSE vs Nasdaq, two robust exchanges competing against each other. But at the moment, NSE isn?t feeling the heat. That?s not good for India?s capital markets and that?s what Kannan is mandated to change.

An engineer, economist and business manager by training (electrical engineering and economics from BITS Pilani and MBA from Vanderbilt, US) Kannan has Merrill Lynch on his CV. His colleagues at Merrill, which is now part of Bank of America, have nice things to say about him??focused? and ?down-to-earth?, for example.

He was certainly focused enough to have turned down an earlier offer to head BSE. When Manoj Vaish quit in 2004, the job was Kannan?s for the taking.

But BSE then was still a brokers? club?some called it a clique?and broker-members didn?t leave too many decisions to professional managers.

2009 is different. Insiders say Kannan?s experience at the world?s top exchange NYSE, can now be put to good use. As senior VP, NYSE Euronext, Kannan has dealt with pretty much everything in the stock exchange business. He worked his way up, starting as a research associate at NYSE, and on the way up caught the attention of John Thain, then chief of NYSE and later of Merrill. Thain and his NYSE team, including Kannan, acquired the electronic trading platform, Archpelago, and also helped NYSE go public.

Kannan?s close associates say he has always been ?low profile?, which can be strength, but can work against you when your mentor leaves. When Thain left NYSE for Merrill, Kannan followed him. When Thain left, Kannan felt ?stifled?. A move out would have happened, but that it has happened as CEO, BSE ensures Kannan?s current job will define his professional career.

BSE Chairman Jagdish Capoor reckons Kannan?s ?international experience in financial markets? and ?some of his marvellous past performance? are the assets he brings to the job. A member of BSE, who didn?t want to be named, laid out Kannan?s job: ?In spite of great names in the governing board, BSE?s market share is falling. It hasn?t gone public as yet and on the technology front, the exchange is far behind other exchanges.? Kannan, he said, must have a ?free hand? to turn things around.

BSE board members say Kannan has ?negotiated a lot of space? and they expect no institutional resistance to his taking big decisions. A first-rate management team, BSE watchers say, must be Kannan?s first priority. That could very well be the first truly professional management team BSE has ever had. And that team better track NSE obsessively.

When NSE pioneered electronic trading, clearing corporation, derivatives trading and a new governance model, BSE mistakenly took the strategy of trying to fight change. BSE positioned itself as anti-reforms. As in many other areas of the Indian economy, this is a losing position in modern India, where the case for reform has been amply made.

NSE is now India?s most important financial exchange. On the all-important derivatives market, BSE?s market share is essentially zero. The BSE Sensex is famous, but it is irrelevant in derivatives, where Nifty has won.

NSE has built up immense liquidity with Nifty futures, Nifty options, currency futures and single stock derivatives. BSE?s market share on the equity spot market has dipped ominously.

In 2001, a BSE President resigned in an environment of scandal. In the following period also, there have been concerns about whether the highest ethical standards have been upheld.

Market experts say Kannan?s priority should be to replicate NSE?s governance model, where there is a three-way separation between shareholders, managers and traders. The larger community should welcome a BSE that upholds the highest ethical standards, and vigorously competes with NSE at the level of ideas.

However, Kannan will need some help from Sebi, market experts say. At present, Sebi requires NSE and BSE to use identical market structure in all respects. Both exchanges start trading at 9:55 in the morning, stop at 3:30 pm, use an electronic order book, etc.

Under these conditions, BSE will face an uphill task for it will at best be a country cousin to NSE. If Sebi shifts away from specifying details about products and markets, then both NSE and BSE can innovate and differentiate themselves.

In jargon, such a regulatory change is called a shift from a rules-based to a principles-based approach. Indian regulators in general favour rules-based monitoring. Persuading Sebi to think otherwise will be tough.

Kannan has his job cut out.