MCX-SX finally in the game

Vol. 6 | issue 7 | August 2012

 

BUSINESS

markets equity

 

MCX-SX finally in the game

MCX-SX will be a testing case for the regulator

 

by Anil Tyagi

 

MCX-SX, which recently received permission to launch its equity trading platform, has announced that its benchmark index will be known as ‘SX-40’ – an index of 40 stocks chosen on the basis of liquidity and promoter stake in comparison with BSE Sensex that comprises of 30 stocks and the NSE Nifty that has 50 stocks.

 

MCX-SX Vice-Chairman, Mr Jignesh Shah, announced drastically lower transaction charges while launching the membership drive that is seen to be quite aggressive and may spark off fierce competition among the three players. Justifying the lower fee structure, Shah said, “The optimisation in transaction charges, along with optimal membership structure will lower the entry barriers to capital markets, thereby fostering inclusive growth.” However, there is hardly any empirical evidence to prove the same except for the fact that it may encourage members to go in for self driven volumes as also day traders who may not do any good to the market except making it more risky. It may be worth mentioning that the exchange fee accounts for only a small portion of the trader’s total cost.

 

The membership drive launched by MCX-SX is also likely to lead to claims and counter claims on its success. Some basic financial calculations reveal that the membership costs seem to be on the higher side. The basic fee plus deposits add up to Rs 50 lakh (though MCX-SX is offering some discounts to certain specific categories of members till October 18, 2012). A simple rate of interest at 12 per cent per annum works out to an opportunity cost of Rs 50,000 per month. Anyone, other than existing BSE and NSE members, who wants to start a broking business will have to spend a tidy sum on setting up considering the sky-rocketing real estate prices and soaring rentals. Add to this, the usual staff costs, administrative expenses, regulatory compliances and so on, the business model may not appear to be worthy of a second look. 

 

At the minimum, even in a class B or C city, the total may add up to a monthly expenditure of well above Rs 2 lakh or an outgo of Rs 10,000 per day assuming a total of 20 days the market works in a month. Earning a brokerage of Rs 10,000+, based on the author’s own experience and discussions with some well established brokers, is a herculean task by any standard that too coupled with the entire gamut of risks like client defaults and so on. This probably is the sole reason that has made the broking business witness a lot of consolidation in the recent past. Small brokers offering personalised services to retail investors are already a vanishing tribe.

 

The MCX-SX’ dream of having a nationwide network may come crashing despite its innovative though un-researched proposal of giving membership under the rural entrepreneur category. Looking at the way, markets have performed post the 2008 crisis and steadily dwindling retail investor population in view of the regulator’s failure to address their legitimate concerns and grievances, this category of membership may remain a non-starter. So, any claims of the membership drive being a hugely successful exercise need to be taken with a pinch of salt.

 

Moreover, the stock exchanges are expected to act as ground level regulators and are expected to take up issues facing governance and transparency facing their member brokers. Even an established and so-called efficient exchange like NSE is found wanting whenever complaints, especially by small investors, have been lodged against its member brokers. One can’t expect the situation to be any better in case of MCX-SX, more so when a real struggle is likely to be witnessed for notching up any additional business in a fiercely competitive scenario. The urge to grab a higher share of the market may lead to compromising on regulatory compliances and risk management. Is the SEBI listening?...........READ MORE