The Bombay Stock Exchange (BSE) remains firmly supportive of interoperability between India’s two securities clearing houses – an option currently under review by the Securities and Exchange Board of India – and is optimistic regulatory approval will offer a big boost to smart order routing volumes, according to the bourse’s chief business officer, Balasubramaniam Venkataramani.
“BSE is of the view that a single corporation might not be the only good thing to do. We prefer an interoperable model. We already have two depositories in India and they operate on an interoperable basis – that is primarily what we are pushing for,” Venkataramani told TheTRADEnews.com during the tenth Asia Pacific Trading Summit of FIX Protocol held in Hong Kong on 8 May. “Once that happens, the costs of clearing will go down significantly because the cost of clearing is about posting margins, collaterals. Once you can trade on multiple exchanges, you’re going to see an explosion of arbitrage volumes.”
Noting an “explosion” in electronic trading volumes in India over the past 6-8 months, Venkataramani said most of the local brokers in India are also embracing electronic trading and they are looking at putting servers in the colocation, trying to get more executions at the best possible price.
The need for interoperability between the clearing houses owned by India’s two equities markets – the National Stock Exchange (NSE) and the BSE – has become more apparent since SEBI authorised smart order routing (SOR) in 2010. SEBI initially permitted SOR in India’s cash equities markets in August 2010 but then issued a further circular in December to clarify that routing between stock markets was allowed for all order types.
However, the potential savings to investors’ trading costs from being able to route between exchanges in pursuit of best price is offset by India’s high post-trade fees, which stem largely from the absence of interoperability at the clearing level. A further barrier is that many front-end trading systems used by buy-side trading desks in Asia are unable to split an order that is executed across two venues for confirmation purposes.
Both the NSE and BSE are vertically integrated exchanges which own stakes in both clearing and settlement facilities. Competition and interoperability already exists between Central Depository Services (India) – the central securities depository partly owned by the BSE – and National Securities Depository, in which NSE has a stake. But there are no similar arrangements between the BSE’s Bank of India Shareholding and the NSE’s National Securities Clearing Corporation.
“In India, we have a multiple exchanges environment, so there’s a competition framework already created,” Venkataramani said.
The BSE, which has a smaller share of Indian equities trading, has all along been markedly more supportive of moves toward clearing interoperability than the NSE because the latter believes any interoperability arrangement would have to take into account risk management implications.
Prior to joining BSE, Venkataramani was part of the core team involved in setting up the NSE and played a key role in the setting up of the NSE’s trading systems for the equity segment, creation of indices (Nifty 50), introduction of the certification program and equity derivatives market segment of the NSE.