India's new stock exchange MCX-SX started trading shares on Monday with thin volumes, taking up a steep challenge to build liquidity and win market share against dominant player National Stock Exchange (NSE) and the smaller and older BSE Ltd.
As of late Monday morning, the value of shares traded on the MCX-SX was 1.5 million rupees ($28,000), its web site showed, compared to 34.3 billion rupees on the NSE.
"Earliest we can know whether MCX has made a mark in equities is five years from now," said Phani Sekhar, a fund manager at Angel Broking.
Brokers are cheering on MCX-SX, which quickly built one of the country's top commodity bourses, in the hope it will push down trading costs and drive development of trading products.
Although trading volumes are expected to rise in line with the government's goal of bringing more retail investors into stocks, the exchanges face a gruelling battle for market share that will essentially be a zero-sum game in the near term.
"MCX is known for product innovation, so only when they come up with truly meaningful innovations is when they would get successful," Sekhar said.
Policymakers have long sought to bring more retail investors into stocks via mutual funds, which owned only 3.6 percent of the broad BSE index last year, according to Citigroup data.
Gold and property are preferred by investors in India, where fewer than 5 in every 100 people buy equities either directly or through mutual funds, regulatory data show. By comparison, more than half of Americans own stocks, many through 401k pension plans, according to a Gallup estimate. In China, 86 percent of trading on domestic markets is carried out by retail investors.
MCX-SX will thus have to win market share at the expense of existing exchanges. The total value of share trading on the NSE was $526.1 billion last year, compared with $110.3 billion on the BSE, according to World Federation of Exchanges data.
Combined, that amounts to a quarter of the $2.6 trillion traded in the Shanghai Stock Exchange last year.
BATTLE WITH NSE
The entry of MCX-SX sets up a battle with NSE, once an upstart itself. After starting stock trading in 1994, NSE overtook BSE several years later, in large part by introducing new derivative products.
The competition is also coloured by the acrimonious relationship between MCX-SX and NSE, which have frequently sparred publicly, especially over fees. Both already compete aggressively in currency futures.
Costs could be the first battle. Traders say MCX-SX's structure lowers trading costs. NSE has countered by lowering membership fees for brokers under certain incentives.
The bigger battle could be waged in derivatives. The NSE has posted average daily turnover in this segment of 1.22 trillion rupees ($22.8 billion) so far in the fiscal year ending in March, accounting for the bulk of its overall equities trading.
MCX-SX is already focusing on this by offering to reduce settlement times in futures and options.
MCX-SX has experience to fall back on. One of its two controlling shareholders is Multi-Commodity Exchange of India Ltd, which operates commodity exchange MCX. The other major shareholder is Financial Technologies (India) Ltd , which provides trading software for brokers.
Both the NSE and BSE are owned by domestic and financial institutions, with Deutsche Boerse AG and Singapore Exchange Ltd owning stakes in BSE and Goldman Sachs Group Inc, Citigroup Inc, and Morgan Stanley owning stakes in the NSE.
After starting trading in 2003, MCX quickly overtook India's National Commodity & Derivatives Exchange Ltd (NCDEX) in trading of gold and metals, in large part by focusing on developing derivatives contracts.
"MCX's strength has been business development and they know how to create liquidity for new contracts," said Gnanasekar Thiagarajan, a director at Commtrendz Research.