BSE continues to face the challenge of best price execution for achieving a level-playing field, believes MD and CEO Sundararaman Ramamurthy. He tells Ananya Grover and Mahesh Nayak that the exchange has requested SEBI to consider making SME entry criteria more stringent. Excerpts:
What were some of the key challenges when you took over as MD & CEO?
The list is long. Out of 10 years, there were operating losses in 7. The main source of income was treasury and listing fees, and there was no derivatives product at all. A significantly large amount of around Rs 500 crores had been distributed to members over a period of time, for liquidity enhancement and technology scheme, but it did not have any impact on the bottom line or top line positively. There were other challenges including, employee morale and looming retirement of many CXOs were retiring and infrastructure.
But we are in a better place now. We have fewer pay grades and a clear methodology of appraisal. Changes in infrastructure have been made. The most important part is building business. So, we met 350 brokers and factored in all the inputs they provided. The results are very evident. All the nine quarters till now, every quarter has been better than the previous quarter. That’s the way we have been progressing.
Do you think introducing products in the F&O market has been key for BSE’s revival?
It was one of the most important products, but not the only one. Our mutual fund business orders have tripled. The total AUM across all BSE indices is somewhere around Rs 11.5 lakh crores, with the passive alone being around Rs 2.5 lakh crores.
We have started enhanced data as a new line of business. Another is co-location services. The number of listings are also increasing. So, it’s just not just derivatives, but 30% plus is non-trading revenue for us.
How does BSE keep checks and surveillance on SMEs?
Wherever the problem lies, SME or mainboard, we have to ensure that enough controls are built so that only good companies come to the market. Having said that, SME started with the feather touch regulatory process. Therefore, there was a clear understanding that there will be bad companies coming in as well. That is why we did not permit retail investord to get into SME by putting in a higher threshold.
While there should be ease, there should be enough control. Out of the 600 companies, around 55 are not in the trading system, as they are suspended or delisted. So it’s not that we don’t take action against SME companies. Quite a few of applications are rejected as well.
We have given AI software to the merchant bankers and told them that before applying, they should check whether the company is BSE compliant. We should also make entry criteria more stringent which is what we are doing. We have also requested SEBI to consider as well where they have to give a directive.
What is your take on the longer-tenure contracts being pushed by SEBI? Do you think weekly Bankex contracts are essential for liquidity?
Bankex lost all its volume almost when it shifted from a weekly contract to a monthly contract. We feel that we need to educate market participants on the importance of monthly products and their benefits for arbitrage or hedging. So, we are in the process of doing so. At some point, this will have its impact.
Are there any plans to launch more derivatives?
There are some plans on equity products. But we feel that this is time has now come for us to think about a larger plate. We should think about how we popularise corporate bonds because things have not worked out despite all the efforts from the government and the banking and market regulators.
SMEs and mutual funds are important. We need more corporates to come. They should not all be only big corporates. When there are 600 million SMEs, how do you identify say maximum 60,000 good SME companies and bring them for listing? That is very important and will help in capital creation for the country.
What are the challenges in the cash market? Do you think it is a level-playing field now?
The common contract note has been taken care of, but still a lot of retail mobile apps do not provide a level-playing field. The Smart Order Routing, when it is switched, will not send any order to BSE, because it is based on crude logic of taking only one exchange’s prices and volumes. So, best price execution still remains as a challenge and we are talking to market participants.
Now that there is a common contract note, they should use it and insist on best price execution. We should request all the high frequency traders (HFTs)of ours to put their servers in the co-location racks that we have provided and start using them for generating algorithmic volume so that they can do more market making with BSE and more order matching will happen in the exchange as well so that the overall market grows.
Last quarter’s revenue growth was driven by the derivatives segment. Did you see an impact of SEBI’s measures in the F&O segment?
It is too early to conclude whether we have seen a full impact of the SEBI measures on volumes. The losses incurred are not insignificant. So we will be concerned about it. So, we need to see how things pan out. Last quarter, we did well but that is because of a host of other factors. We are not in the volume game now, but the economic purpose that we serve.
After Jane Street a lot of HFTs have become cautious, have you seen a reduction in volumes? What could have been done at the exchange level?
Jane Street was not a very big participant at BSE. So, the impact for BSE will be minimal
The SEBI order talks about buying cash in the index going up and then subsequently taking bearish position in the derivatives market. The next step is to sell off in the cash market so that the index falls. So the bearish position gives them money. The loss that happened in the cash market is compensated by the profit made by the bearish direction that they have taken in the derivatives market. So for a person to make it sensible, he has to do both the legs.
Institutional participation in BSE’s cash market leg is absolutely minimal and if one argues, maybe they did the derivative trade in BSE and manipulated it in the other exchange, I wouldn’t know because many of them do not use me as their clearing agent. It is not a surveillance failure. It is an enforcement matter.