MCX SX all set to target NSE's high margin business

The task is difficult but Jignesh Shah has set his sights on growing and taking away share from NSE, the dominant stock exchange in India

Pravin Palande
Updated: Aug 23, 2012 06:55:03 AM UTC

The promoters of MCX SX can finally breathe a sigh of relief. They now have the permission to operate the third stock exchange in the country ending a four year battle with the regulators. Financial Technologies and MCX each own 5% as direct equity in MCX SX along with an additional aggregate stake of 60% in the form of warrants which they will have to divest in the coming three years.

Nikhil Vora, Managing Director of IDFC Securities feels that a third stock exchange in the country is a positive sign. “We see this development as being extremely positive for the Financial Technologies Group. The equity segment is by far the largest (60%+ of industry turnover) and most profitable segment of the Indian Exchanges industry. With the FT Group having demonstrated strong execution capability across all other exchange platforms, we see their entry into equities as offering a huge growth potential”, says Vora.

The business of stock exchanges in India is highly profitable. NSE and BSE together make a net profit of around Rs 1000 crore with high net profit margins (NSE has a net profit margin of 50% while BSE is at 35%). No wonder then that MCX has been eyeing this business for a long time.

The third exchange expected to lower the fees for brokers and induce more competition.Will the brokers bite the bait? Analysts who track the exchanges space feel that it is a long term game. “Right now only two percent of Indians trade in the equity markets. Eventually this share has to go up. MCX SX has taken a long term call and it might just work in their favour”, says an analyst with a leading brokerage.

But many are skeptical. This is because stock exchanges is a sticky business. It is not easy to move brokers and traders away from one exchange to another once they get comfortable doing business with a particular entity. BSE has tried many ways to lure traders away from NSE to build in liquidity. But they have had little success.

MCX SXs biggest challenge will be liquidity.  MCX SX is not clearly talking about its strategies but one of the areas that they will seriously target are the SMEs and mid cap companies which they feel have got a raw deal in the bigger exchanges. Around 66% of the total market capitalization of the NSE belongs to the Nifty Fifty Index and the rest is accounted by 1511 stocks.

MCX SX will try to get the smaller companies to trade on their exchange as they have been ignored both by the brokers as well as the investing community on the larger exchanges. NSE on the other hand understands that there is a big opportunity in smaller companies and is very serious that this market should not be lost to MCX SX, if the market ever exists. The exchange has tied up with CRISIL to give research on small companies which is given as a value added service to brokers who in turn can look at these smaller stocks seriously.  Due to the present market conditions and the overall problems that Midcap companies face, most research houses stay away from trading in these stocks. Midcap and small cap stocks in general are not considered liquid. The cost of liquidity, which is measured in terms of impact costs works out to 0.05% for the Nifty Fifty for the portfolio of fifty lakhs. For midcap 50 which accounts for 6% of the total market, the liquidity cost is several times higher.

MCX SX in an earlier story with Forbes India agreed that they have a clear cut plan of bringing liquidity into SMEs and smaller companies. Both Jignesh Shah, the promoter and Joseph Massey, MD and CEO of MCX do not want to talk about any specific details about their strategies as they feel that rival exchanges have been quick to pick up their ideas and implement the same.

The thoughts and opinions shared here are of the author.

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