As Vikram Limaye moves in to the corner office of the NSE, everyone will be keenly watching the manner in which he navigates the first few days. Given the situation NSE finds itself in currently, the statements he makes and the manner in which he handles the regulator and media will go a long way towards assuring everyone that the exchange is on the road to repairing its dented image.

The main problem confronting the exchange currently is one of a severe damage to its credibility. The NSE that had awed market participants with its technological prowess and stellar growth since its inception in the Nineties, had also, somewhere along the way, become a trifle too arrogant, riding roughshod over other exchanges, grabbing market share through aggressive pricing strategies and showing scant respect for competitors.

It is this hubris that proved to be the undoing of the former management team in the NSE. Limaye will, therefore, have to ensure that NSE dons a less aggressive avatar under him to face the challenges confronting him.

The colo issue

The first task before Limaye is to clear the air in the NSE colocation issue. The perception among the public, is that the entire exchange infrastructure was exploited by a few traders who logged into the system ahead of others, compromising the interest of the smaller investors. But this is far from the truth.

The breach took place in the colocation facility of the exchange, where only a handful of foreign and domestic institutions put through algo trades. Also, the breach took place between December 10, 2012, and May 30, 2014, when the colo facility operated through the tick-by-tick trading (unicast) system. A trader logging in first to the colo servers then, could have an advantage through the trading day. But the exchange has shifted to a Multicast TBT system since 2014 where benefits of early logging have disappeared. The independent agency that investigated the colo issue has stated that the benefits from early connectivity have been addressed through this.

Unfortunately, understanding of this issue is extremely muddled, not just among investors but in the media as well. The regulator seems to be in an equally confused state regarding the contours of the issue, commissioning repeated audits, despite the earlier audits from independent agencies failing to unearth any unfair gains.

The current state of affairs is a direct consequence of the former management’s mishandling of the colocation issue when it first came to light. When MoneyLife magazine published the whistle-blower’s letter and demanded an explanation, the exchange slapped a ₹100-crore defamation suit on the publication. The Bombay High Court, rightly called this action ‘arrogant’ and imposed a penalty of ₹50 lakh on the exchange.

With this high-handed, we-are-too-big-to-be-questioned attitude, the exchange has made enemies of the entire media industry in the country and brought down the regulator’s ire upon itself as well.

The new chief needs to, therefore, clear the air on this issue first. It needs to be driven home that the issue was addressed way back in 2014 and many heads have already rolled as a result of this. The regulator needs to be convinced that the processes are much better now with documentary proof backing the internal surveillance.

The market regulator, SEBI, too needs to understand that this witch-hunting is eroding the credibility of the Indian markets as a whole. It is in the interest of the Indian capital market to bury this issue now and allow the new chief to start with a clean slate.

Correcting the skew

The other issue that Vikram Limaye needs to tackle is the correction of the anomaly in trading pattern on the Indian exchanges. Currently equity derivatives account for 90 per cent of the trading volumes on the exchange with cash market accounting for just 10 per cent. This is not a healthy state as it is the cash segment that aids in capital raising and adequate volume in this segment is essential to create demand.

On the other hand, the primary purpose of the derivative segment is to help investors in the cash segment hedge their risk. But in Indian exchanges, derivatives are witnessing inordinate interest. Within the derivatives, Nifty and bank Nifty futures and options account for a large chunk of the trading. This anomaly needs to be checked and the new chief needs to ensure that the volume is equally distributed across counters to create a healthier market.

Improved surveillance

The equity investing culture is gaining traction in recent times with the entry of pension money and bountiful flows into equity mutual funds. Limaye has to ensure that the exchange manages to retain investors’ trust through strong surveillance and checks on price manipulations. Given the over-heated markets, it might be a good idea to increase margins in derivatives to keep away smaller traders, who typically tend to get trapped at higher levels in such conditions.

In the light of the trading halt in the cash segment of the exchange last week, a review of the procedures to deal with system malfunctions is also necessary. While the recent instance did not lead to any loss to investors with stock prices remaining flat during the halt, dealing with such trading disruptions have been pretty messy in the past. When a dealer at Emkay Global mixed up the volume and price columns on a trade and punched in an erroneous sell order for ₹650 crore worth of Nifty stocks in 2012, it led to long-drawn haggling over cancelling the trades. It would help if the exchange lays down rules for dealing with such situations.

Beyond equity

With commodity derivatives falling under the Securities and Exchange Board of India, the exchange could now try and expand its presence in this segment as well. Corporate bonds is another segment that needs attention and could serve the interest of both corporates as well as investors if volumes in this segment pick-up.

Let’s hope that under Limaye, the NSE enters a new phase in which it is able to balance the demands of its shareholders to generate returns with its responsibility towards investors to provide a credible and trustworthy trading platform.

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