After a long hiatus, the Indian stock exchange landscape is witnessing a new era of competition. Early this year, MCX Stock Exchange (MCX-SX), a subsidiary of India's leading commodity bourse, the Multi Commodity Exchange (MCX), promoted by Financial Technologies, a prominent vendor of exchange trading solutions, announced plans to enter equities trading. The stock exchange has been operational since last year, starting out trading in currency futures. MCX-SX is now awaiting the go-ahead from India's capital markets regulator, the Securities and Exchange Board of India, to trade in equities. What is remarkable about this move is that MCX-SX is the first player in the past 15 years to venture into equities trading.
 The last time a new exchange entered the fray was when the National Stock Exchange (NSE) was launched in the early 1990s. It challenged the hegemony of the then market leader, the 134-year-old Bombay Stock Exchange (BSE), and revolutionised the way trading was carried out in the country. Moving away from the open-outcry system practised at that time by the BSE and the 20 or so regional exchanges, NSE adopted an electronic order-matching system that provided it with a nationwide reach, away from the broker-dominated financial centre, Mumbai (formerly known as Bombay), the stronghold of the BSE. "The NSE did a remarkable job in transforming the market," says Ashvin Parekh, partner at Ernst & Young's global financial services unit. He says that NSE has brought about dramatic improvements in governance, not only in terms of technology, but in terms of transparency and risk management processes as well.
Derivatives dominance
 As the NSE took the lead in the cash market, the real market changer was the launch of the equities derivatives segment at the turn of the century. While the BSE, mired in internal politics, dithered, the NSE established complete control over this burgeoning market. Nearly 100% of derivatives trading and about 70% of equity trading is carried out on the NSE, with the remainder accounted for by the BSE. The one area where the BSE still leads is in brand awareness. Its BSE Sensex is much more widely recognised and quoted than NSE's 50-share index, Standard & Poor's CNX Nifty. The regional exchanges in the country have little play in any market.
 The moot question this time around is: will MCX-SX bring about a similar shake-up in the equities space as NSE did 15 years ago? There are differing views. Although greater competition will be beneficial to the market, there is no crying need for change, say some industry experts. S A Narayan, managing director of leading brokerage firm Kotak Securities, says: "When there was only the BSE, there was a clear case for a new stock exchange. BSE wasn't willing to be progressive, it had a proprietary attitude and there was a need for an investment in technology. At that time, there was an obvious space in the market, but this is not so now. As of now, NSE is fulfilling all the requirements of the brokers and clients. However, competition is always welcome."
 Rashesh Shah, chairman of Edelweiss Capital, a leading investment bank and brokerage house based in Mumbai, says: "The NSE has a very good platform and has done a very commendable job of servicing the market." Throughout the crisis and volatility of the past 18 months, he says, clearing and settlement went through very smoothly on the NSE platform.
 Mr Shah nonetheless says that while the Indian stock market is technologically very advanced by global standards, the product range is very basic: "One-third is cash and two-thirds is futures and options. We need to grow currency futures, while interest rate futures and corporate bond trading need to come in."
Innovation required
 Dr Chiragra Chakrabarty, associate director at PricewaterhouseCoopers (PwC), says that the NSE has immense scope to enhance the existing product range through innovation. "In terms of technology and self-regulation, NSE has done a very commendable job and achieved the laid-out objectives effectively. However, in the area of products, a lot of work remains to be done. The only new products it introduced was plain vanilla equity futures and options of different tenures. That was about 10 years ago. While equity futures have developed, options are still thinly traded."
 Competition, says Mr Chakrabarty, will give the much-needed impetus for innovation in the equities segment than has been evident in recent years. He also believes that investors can benefit from arbitrage positions by trading across different exchanges for similar product ranges.
 MCX-SX's track record and parentage suggest that it could provide the type of competition that has long been missing in the equities space. The stock exchange's promoter, Financial Technologies, provides trading technology solutions to stock exchanges around the world and the MCX, which was established in 2003, is the unquestioned leader in the commodities segment. Effectively, MCX-SX, the currency futures market that was launched last September and has seen volumes increase 18-fold since, has been competing neck and neck with NSE. For the NSE, it is a brush with serious competition after many years and, according to local media reports, the rivalry between the NSE and MCX-SX in the currency segment has at times turned ugly with accusations about anti-competitive behaviour.
 "MCX is a very able competitor and one needs to be aware of this aspect in the market," says Rama Seshan, CEO of the National Commodities & Derivatives Exchange (NCDEX), that has been co-promoted by the NSE. He should know. Both NCDEX and MCX started off in the commodities segment at nearly the same time: NCDEX focused on agri-products, which languished, while the latter focused on metal and oil, which boomed. MCX now enjoys more than an 80% market share. Recently, NCDEX's efforts to make inroads into the metals space by reducing fees were thwarted by the regulator, the Forward Market Commission. The matter is currently going through the courts.
 Joseph Massey, director of MCX-SX, says the stock exchange will bring the same focused and innovative approach to the equities market that has helped MCX take the lead in commodities. He says: "Before 2004, the commodities market did not exist. Now it is booming. To create this market we adopted an innovative approach of extended timings, introduced new products, focused on educating our customers and added convenience of providing ecosystem support to simplify risk management operations. Following the government's theme of inclusive growth, we have gone down to semi-urban and the rural level and have more than 2000 members. We deployed customised technology and have used education as a big tool to reach out." MCX-SX, he says, plans to take the equities market beyond the 700 or so towns and cities where existing exchanges are present, down to the semi-urban level across India, to enable the entire nation to participate in the market-based saving and wealth creation process.
Rashesh Shah, chairman of Edelweiss Capital
Opportunities for grabs Jignesh Shah, vice-chairman of MCX-SX, says: "Existing exchanges are not innovating enough to seize the India opportunity. India has household savings of about $330bn. Ten per cent of it should be channelised by a credible, transparent world-class infrastructure for industrial development." He adds: "There are multiple geographies to be serviced and multiple instruments needed in the Indian markets today. The small and medium-sized enterprise (SME) market is still untapped. No one is servicing the SMEs. There are many other missing markets such as interest rate derivatives, the corporate bond market, securities borrowing and lending. We want to develop those segments which are missing today. Our commitment is to take equity and bond to the tehsil [administrative division] level."
 NSE chief executive Ravi Narain denies there has been a lack of innovation, saying that the exchange has always striven to meet the market's requirements. "In the past 12 to 18 months we have launched several new derivative products such as the VIX methodology from Chicago Board Options Exchange to measure the volatility of the market. We were the first exchange to launch currency futures and have done half a billion dollars of business in the past six months. We are planning to introduce new currency pairs and currency options and are waiting for Securities and Exchange Board of India approvals for these. After that, we will plan to go on to interest rate derivatives. With interest rates being very volatile we need to hedge interest risk. Regulatory discussions are going on and we should be able to start trading interest rate derivatives in the next year."
 NSE has recently introduced cross-margining for equities and equities derivatives and has started focusing on options. Mr Narain says that both index options and single stock options have taken off very well. The NSE, he says, is also considering providing a platform to meet the capital-raising requirements of SMEs.
 On the process side, says Mr Narain, the NSE has worked to enhance capacity and reduce latency so that market participants can use algorithmic trading, which is just about making its presence felt in the Indian markets. In the past 18 months, he says, the NSE has invested more than $60m in renewing technology and reducing latency, which is down to 2.5 milliseconds.
BSE battles on
 The other key player in the equities market, the BSE, which has long struggled to retain and gain market share, has recently appointed Madhu Kannan as its new managing director and CEO. However, it remains to be seen how the stock exchange will perform under him. Rajnikant Patel, the former managing director and CEO of the BSE, who is currently heading the exchange business at Reliance Money, a wholly owned subsidiary of Indian industrialist Anil Ambani-controlled financial services company Reliance Capital, advises: "The BSE requires dedicated commitment, far-sighted vision and the ability to put up resources for technology upgrade. The most important thing for the stock exchange is to leverage its brand image and convert mindshare into market share."
 Commenting on the heightened competition in the equities market, Mr Narain says: "Competition is important for the market to develop. Every industry must have competition. Interestingly, India is one of the few emerging markets which does not have only one exchange. That has always been the case."
 But, for a new entrant, gaining liquidity which is entrenched in the existing exchanges will not be easy unless it offers some new technology or product to the market. While market participants in general welcome the new competition, many believe that MCX-SX will not be able to dislodge the current market leader from its position.
Rajnikant Patel, currently heading the exchange business at Reliance Money
Tough competition "MCX-SX has the necessary experience but it will be a difficult task to fight an established player," says Mr Narayan of Kotak Securities. Gaurav Arora, managing director at brokerage firm Jaypee Capital, says: "NSE will always maintain its lead in equities. It is very professional. There are 9 million contracts per day in derivatives on NSE and it has been doing very high volumes even when liquidity dried up in the market." Jaypee Capital, along with 11 Indian banks and a few other firms, has launched the United Stock Exchange of India, which plans to start trading currency futures in the next few months. Mr Arora adds: "Since currency is a new asset class, it is easier to enter the market. Equities trading, on the other hand, is very well established and it would be much more difficult to make an impact there."
 A key advantage that MCX-SX brings to the table is its roots in the commodities space, says PwC's Mr Chakrabarty. "Investors in the semi-urban and rural segment have hands-on experience on the MCX platform. Since there is a link between commodities and commodity-related stocks, these investors would easily migrate to MCX-SX's platform in the equities space."
 Commenting on the impact of competition on the equities market, Mr Shah of Edelweiss says: "NSE will still be the leader but the market will get segmented with newer products and asset classes."
 Given the immense potential and latent demand in the Indian market, Mr Massey of MCX-SX believes that its entry in the equities space will lead to an overall growth of the market: "There won't necessarily be a cannibalisation of market share. It will lead to an increase in the pie." Mr Patel of Reliance Money agrees: "As each new exchange will bring in new asset classes and customers, the pie will increase."
