The year was 1991. India was on the verge of launching its financial sector reforms under pressure to meet global payment obligations. The Bombay Stock Exchange (BSE), then 116 years old, dominated the capital market but was more of a brokers’ club. Trading settlements were delayed; there were frequent payment problems and default by brokers was common. The unionised staff, that was key to the smooth functioning of the messy, paper-based settlement system, would announce flash strikes, often on the instigation of powerful brokers who needed time to organise funds or delivery of shares.
There were just a handful of large institutional investors. Of these, Unit Trust of India (UTI) was the biggest and its chairman, Manohar J Pherwani, was considered the biggest bull in the market. Brokers, who lined up every day for business from UTI, saw Mr Pherwani as one of their own. And, yet, in that very year, a committee headed by him first recommended the setting up of a new exchange called the National Stock Exchange (NSE) as one way of reining in recalcitrant brokers. When I first broke this key nugget from a rather detailed report, there was shock, disbelief and a sense of betrayal among brokers. They promptly dashed off letters to their local MP (member of parliament) to begin lobbying against the idea. NSE was eventually set up very fast in the aftermath of the securities scam of 1992, or the Harshad Mehta scam, with a totally different structure; and, sure enough, it started the process of transforming the Indian capital market, until we are on par with the developed work in all that is good, bad and ugly.
In the past 25 years, capital markets around the world have been fully institutionalised, powered by cutting edge technology and high frequency trading, that is dominated by large institutional brokers with money and political clout. The retail investor has been all but edged out. This, many would argue, is even worse than a broker-dominated retail market. In the US, Wall Street’s dominance has gone beyond ‘regulatory capture’. It is accused of controlling the government itself.
It is in this environment that Bloomberg wrote about “Silicon Valley’s Audacious Plan to Create a New Stock Exchange” on 13th June. The idea, floated by Eric Ries, author of The Lean Start Up, a must-read for start-ups, is of a ‘long term stock exchange’ (LTSE), to counter yet another evil of listing—“the frantic quarterly cycle to encourage investors and companies to make better decisions for the years ahead.” According to Bloomberg, the LTSE aims to fix the malaise of “short-term thinking that squashes rational economic decisions.” This is not the only one. The article says that Brad Katsuyama is working at approval for the ‘Investors Exchange’ which aims to neutralise the ‘unfair advantage’ gained by high frequency traders. It is no surprise that the big US bourses are reportedly furious and threatening lawsuits.
It is not clear whether either of these ideas will take off or lead to a structural change. It could well be that the existing bourses will see the writing on the wall and make major changes, as they did in the 1920s. Either way, we may see a paradigm change which is bound to have an impact on the structure and operations of Indian bourses as well.