Sunday, February 15, 2009

NSE VS Financial Technologies

They have been locked in fierce competition to gain supremacy in the nascent market for currency futures trading. But the battle between the National Stock Exchange (NSE) and Financial Technologies (FT) is now being fought in the courts too, and has taken many other forms — from blocking technology access to predatory pricing, and more

NSE fired the first salvo by hitting FT where it hurts most. First, it bought stake in a software company called Omnesys, developed its own technology called NOW, which is similar to ODIN, and offered it to brokers free for three years. Critics call this predatory pricing, but an NSE spokesperson said the exchange has always tried to reduce costs to its members. “Our NEAT software given to members is also free and providing NOW (free) is in line with that policy,” he said.

Second, it put ODIN on its watch-list and rejected FT’s application for any new installations or licences.


FT, however, was quick to hit back and moved the court, saying NSE acted with mala fide intentions of stifling competition.


The first round of the court battle has gone in favour of FT, with the court saying, "the allegations in respect of malafides have considerable substance", but without giving an opportunity to NSE to reply "it is not proper to decide as to whether the compliant regarding the defective software ... is reasonable" and whether NSE's approach is "rather malafide" towards FT.
The court also observed that NSE can’t use its whims and fancies to pick and choose vendors.”


In another order dated January 30, the court ordered a systems audit and said NSE should not deny approval for the product for new users, and existing users should continue using it.

NSE has appealed against the order on systems audit and said putting FT on the watch-list was in good faith based on deficiencies in the software reported by trading members. The court later allowed KPMG to carry out the audit of FT's software.
ODIN is just one of the many battles in which the two exchanges are locked. On currency futures transactions, the fight is over transaction fee.
NSE, for example, has kept zero transaction fee on currency derivatives — a practice that MCX has criticised.


“NSE is cross-subsidising its currency futures business through its income from the F&O segment. This is against the concept of a level playing field,” an MCX-SX spokesperson said.
NSE, however, says this is not unusual because any new product requires some efforts in market development. Typically, during that period, NSE does not levy transaction charges. This has been the case in most product launches such as Mini Nifty, Nifty Junior, CNX 100, Defty, etc.


The fact is NSE can afford to keep transaction fees at zero because it has a substantial income from other segments such as derivatives and equities.

On the other hand, MCX-SX’s income is entirely dependent on the transaction fee from the currency segment. So it is in a classic Catch- 22 situation: it will not be able to compete with NSE if it imposes a transaction fee. But if it doesn’t levy a transaction fee, the exchange’s financial viability will be in question.

Observers said the market regulator should look at enforcing either a minimum transaction fee or allow new exchanges to launch cash and F&O segments if it wants to ensure fair competition.