At NSE, it's all about speed and tech now

In early nineties, Phiroze Jeejeebhoy Towers, which housed Bombay Stock Exchange in the historic Fort area, a few minutes' walk from the Victoria Terminus, was still the final destination for stock brokers. The money-minded brokers continued to flock at the shouting ring at the Asia's oldest bourse even when it was gasping for breath under the Big Bull's near-fatal grip. On the other hand, India was on the verge of an economic crisis and an imminent default, before it made conscious efforts to unshackle the closed economy, and reluctantly opened up its gates for global giants.

When a brand-new tech-savvy, institutionalised bourse swung into operations in 1994, bringing trust and transparency to the fore, it was rewriting the history of India's fledgling equity markets. Amid the cacophony that fixed your stock price at the Bombay Stock Exchange (now called BSE), transparency was the sacrificial goat. Brokers and sub-brokers thrived as investors struggled to ascertain the actual buy/sell quotes, and remained at the mercy of brokers who traded on their behalf.

NSE, the world's first fully electronic exchange, changed the entire landscape of Indian stock markets, says Sankarshan Basu, associate professor of finance at IIM-Bangalore. "NSE was set up as a completely corporatised exchange, and brought in tremendous amount of transparency, helping the cause of corporate governance in the country. At that time, most established international bourses were all mutual exchanges, like traders' clubs."

NSE set up the first depository in India -- the National Securities Depository Ltd (NSDL) and introduced dematerialisation (demat) of shares. Settlement cycles were shrunk; lot sizes dipped, leading to a sudden spurt in retail participation.

In March 1995, NSE's market capitalisation stood at Rs 3,63,350 crore. Cash market average daily turnover was around Rs 17 crore in 1994-95. Just about 678 companies were trading then.

Winds of change swept through India over the next two decades. Probably, nothing chased India's growth in post liberalised era as closely as NSE. As India's economy grew leaps and bounds, NSE's m-cap ballooned to Rs 93,62,454 crore on September 15, 2015, despite the recent fall in stock prices. Cash market average daily turnover has shot up to Rs 17,957 crore. Number of companies trading has more than doubled to 1,553, and around 1.9 crore registered for trading on the bourse.

NSE has continued to remain the largest exchange in stock index options trade across the globe, ahead of Chicago Boards Options Exchange. The total number of index options contracts traded during 2014-15 stood at around 138 crore. In the individual stock options, NSE topped the Asia Pacific region, with 9.1 crore contracts. It is ranked fifth globally in individual stock options. In other segments such as individual stock futures and stock index futures, NSE is among the top players in the world.

Stock brokers say that Nifty options are extremely popular among the options products traded in India. Nifty-50 is among the best traded options, among a whole range of options available.

While the stock exchange continues its successful journey, it was also hit by a few controversies during last few years.

Cut to October 5, 2012. A freak trade on NSE -- what they called a 'fat finger error' -- flabbergasted the markets, and the exchange shut trading for around 10 minutes.

"But what is surprising is that within no time NSE could find out the human error involved in it. It also managed to get the IP address of the terminal from where the freak trade was executed," says a Mumbai-based market watcher.

As it turned out, a dealer working with a Mumbai-based brokerage had committed a blunder. Instead of putting in a total sell order of Rs 65 crore on NSE, he punched in Rs 650 crore, bring the markets down by 16% and obliterating nearly Rs 3.32 lakh crore of investor wealth in a flash of a moment and triggering stop losses for many traders.

Nifty index plunged 920 points (or 16%) within two minutes -- between 9.49 am and 9.51 am. According to the findings of a probe conducted by NSE, the crash was not an outcome of technical glitches in the system, but a result of 59 erroneous orders placed by the brokerage.

An internal probe by NSE solely blamed the brokerage and systems failure at the brokers' end for the crash, while a probe conducted by the market regulator Sebi pointed out that "even in case of a failure of risk management at the end of the stock broker, order-level checks at the stock exchange would have prevented such error".

Subsequently, exchanges implemented market-wide circuit breakers.

"Two days that saw huge volatility in the market was when two successive UPA governments came into power. In May 2004, when UPA-I came to power, markets fell over 25% in two days. In May 2009, when UPA-II came to power, the market hit upper circuit, leading to an automatic shutdown. The market operations were so smooth and despite such huge volatility, there was not a single default," says Basu, underlining the importance of electronic trading and risk management systems in place.

The recent controversy with Moneylife magazine over NSE's high frequency trades (HFTs) saw the Bombay High Court dismissing the exchange's defamation suit and directing it to pay Rs 50 lakh in punitive damages. This stemmed from an article published by Moneylife that high frequency trades (HFTs) or algorithm based trading in NSE jeopardised the interest of retail investors.

"The article is completely imaginary. Time and again we said that the article has failed to substantiate its content. Everything that NSE has implemented is in sync with norms / guidelines issued by the regulators," claimed a spokesperson.

The reinvigorated BSE, under its MD and CEO Ashishkumar Chauhan, has taken the battle to its enemy camp, creating ripples in the market. BSE took on the two foundations that NSE was built on -- technology and speed. Chauhan, an old hand at NSE long before he took charge at BSE, brought in joint ventures with foreign bourses to give his exchange a technological edge.

"Speed is of essence in stock exchange business. Initially, we were slower than NSE. But brokers tell us that we are 10 times faster now. We have been very transparent. We give response time on each order on BSE website. If our competition does not make it transparent and then claim that they are the fastest, how will you corroborate it?" asks Chauhan.

BSE used to run a system called BOLT, which was developed by CMC. "In 2013-14, we completely moved to Deutsche Borse system, which runs on Linux, open source, and basically on Intel boxes," he says.
NSE, however, counters that they are the fastest. "Please note that we have recently made modifications in the system. Our understanding is that the system is the fastest available in India today. We will start publishing the data on our website from October 1, 2015," says the NSE spokesperson.

NSE has continued to enjoy a leadership position in most of the market segments it is currently in. While in the equity derivative segment it holds 80-90% share, it has around 80-90% share in the equity/cash market. Even in interest rate derivative segment, it holds a similar market share. In currency derivatives, BSE has pushed its way up, though NSE is still holding 50-60% share as of now.

As India struggles to channelise more savings into the equity markets, it is a long road ahead for NSE.