(Disclosure:I am market making in the shares of Bombay Stock Exchange)Will BSE Ltd’s plan to enter the commodity segment bear much fruit?Taking up such challenges isn’t new to the exchange. About three years ago, when BSE started competing in the equity derivatives space, it had started from scratch. Its traded volumes in this segment are far more healthy now, although this is aided by market making incentives to trading members.Similarly, it has managed decent volumes in the currency derivatives segment, despite a rather late launch. Again, it helped that it didn’t charge for transactions for quite a few months since its launch. While transaction charges are expected to commence from next month, they will be at a fraction of what its competitors charge. In sum, BSE has done well in garnering volumes in two market segments by lowering costs for traders. Of course, it remains to be seen if volumes will be sustainable once it starts charging fees at cost-plus rates.
But pursuing a similar strategy in the commodities space may entail some additional challenges. To start with, the Forward Markets Commission (FMC) currently doesn’t permit market making. Even if it does allow it in the future, BSE might find the regulator’s ownership guidelines to be a constraint. New shareholding guidelines for commodity exchanges limit the maximum ownership of one entity at 15%. Even if BSE manages to gather other investors to buy an 85% stake in the new venture, it will need a buy-in from this set of investors to invest a reasonably high sum for market making purposes. Like the equity segment, commodities trading now includes a transaction tax, which means that market making schemes should at least offset a large part of this cost for trading members to consider the new platform.
On the positive side, lately, BSE’s faster trading technology, sourced from Deutsche Borse, has generated interest from the trading community. And compared to MCX’s other competitors in the commodities space, BSE is far more aggressive and has better relationships with the trading community. While these factors should help, many others need to fall in place for traders to be open to shifting loyalties.
-from Mint