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What Led To The Growth In Trading Volume Over The Years?
The raising of funds for debt or equity or hybrid is why they are called capital markets although, the actual raising of funds happens with a very low frequency
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Capital markets usually mean markets for long term funds. Due to the organized nature of capital markets in the form of exchanges, they have been amongst the easiest markets to transact on. Speculation has also been an important part of capital markets since beginning.
In essence, the raising of funds for debt or equity or hybrid is why they are called capital markets although, the actual raising of funds happens with a very low frequency.
One doesn’t see IPOs every day and every second. Markets for IPO are also called primary markets. Given the low frequency of the activity and also hard work involved in making documents like prospectus, marketing of the issues over a long duration etc., capital raising or IPO is not an exciting activity, especially from TV perspective.
In contrast, secondary markets have caught people’s attention due to high frequency of trading and day to day movements of prices. They were called ‘Satta Bazar’ even in old times. Secondary market allows already issued debt and equity to trade. It also involves speculation. Earlier secondary market trading used to be done on a physical floor which was called a ring because the shape of the physical space was circular. Now, since 1995, the trading takes place on computer screen at BSE and no one has to come to BSE building to trade. Everyone can place orders on BSE from where ever they are located. Anywhere in the world.
Over last 25 years, Automation increased the speed of trading manifold. What could be done in a few minutes at the earliest started taking place in a second or less in 1992 and now it is done in 150,000th of a second time frame. Speed of trading along with advent of algorithm trading and subsequently co location facilities increased the trading volume manifold. Introduction of leveraged instruments like futures and options increased the trading volumes even more. As per estimates, since 1992, over 25 years till 2017, Indian stock market volumes increased by 5000 times. Or 500,000 per cent. Real time, high speed, leveraged trading from anywhere in the country and the world increased the trading volume.
Surprisingly, the number of people investing or trading in secondary markets over the same 25 years didn’t grow up much in India. As per estimates, the number of investors trading and investing in Indian market hardly grew despite the fact that Indian per capital GDP increased manifold and size of middle class went up by 10 times.
What happened? Why couldn’t we increase the number of people participating in markets India in tune with the increase in middle class? The markets originally designed for investments converted themselves to trading markets. Similar frameworks happened across the world in most developed market where between 25 to 50 per cent people invested in capital markets. They also didn’t increase the number of investors over last 25 years but went more in derivatives and speculative trading. However, those developed countries had reached a reasonable level of participating. Almost quarter to half the population was participating in the markets.
In India, in contrast, the number of people investing in markets doesn’t seem to have gone above 2 per cent in last 25 years by whatever count we take. It also means that Indian stock market investors can grow up by 10 to 25 times to reach 25 per cent to 50 per cent participation rate in the next decade when India enters middle income group of countries. It will be a huge growth of investible capital being used for investments in the country. Indian market capitalization of listed firms is expected to go up from $2.3 trillion currently to $10 trillion over next 15 years.
This increase in investor population and overall investments is possible if we are able to enhance further trust in the markets and distribute financial products to larger number of Indians who have never invested in the markets. It is also required to ensure that the newcomers coming to invest in the market invest for the long term less risky instruments and do not indulge in highly risky day trading or derivatives trading if they don’t possess the skills required in those fields.
For the purpose, BSE has been focusing on distribution of financial products for investments instead of speculation and trading. Wealth of a nation cannot be built up only on speculative or short term trading activities. The nation will have to learn to harness its savings in to productive capital that is not a zero sum game but increases over time as the economy grows. BSE has developed several market leading and innovative frameworks like E-IPO, Bond Distribution, BSE Star MF, SME, etc.
With 70 per cent market share, the ‘BSE Electronic Bond’ platform is the preferred platform for companies to raise debt funds of a large scale. Since, April 1, 2016, BSE Bond platform has raised more than Rs 2.5 lakh crore.
The ‘BSE SME’ platform, India's largest platform with close to 70 per cent market share, enables SME companies with a post issue face value capital of as low as US$ 100,000 to access the capital market to raise funds. BSE SME has now raised Rs 1,757 Crores for 213 companies whose market capitalization has become Rs 20,493 crores. BSE SME accounts for more than 75 per cent SME companies listed in Indian capital markets.
Similarly, the ‘BSE StAR-MF’ platform is India's largest digital platform to distribute Mutual Funds. Commanding a market share of close to 80 per cent amongst exchange distributed funds. More importantly, it accounts for more than 50 per cent of all new retail funds flowing in to Indian MFs. It was not made compulsory to distribute MFs through exchanges alone. However, due to better value and speed, comfort, consistency and low cost associated with BSE star MF platform, it has now over 200,000 people associated in over 3000 cities. BSE Star MF platform has experienced a growth of over 500 percent in the last two years. In the current fiscal, the platform processed a record one crore transactions with a total value of over Rs 75,000 crore in first 9 months alone.
Other frameworks like offer for sale (OFS) and offer to buy (OTB) etc. have also met with tremendous success. BSE commands leadership roles in these segments, with a market share of close to 90 per cent. In OFS, since 2012, BSE has been the designated exchange for 170 issues, with a market share of 86 per cent. Similarly in the OTB segment, since July 2015, BSE has been the designated exchange for 173 issues, with a market share of 96 per cent.
In essence, BSE has positioned itself as the Investment Exchange of India recently and achieved many of its objectives.
To take this concept further, BSE now plans to also provide insurance distribution through its nationwide distribution system available in more than 3000 cities having more than 200,000 people connected with it who are highly compliant, literate and used to providing financial solutions. BSE insurance distribution framework should be ready in next few months. We hope it will be as useful to investing public as much as it will be useful to the agents and other intermediaries who will get automated single window framework for many insurance companies which will help them service their clients better as compared to the current manual framework.
Indian financial distribution system is changing rapidly. BSE is playing a leadership role in adopting modern technologies to the growing and ever changing needs of India like it has done for over 142 years. BSE has now truly become a catalyst for capital formation in the country instead of acting solely as a speculative entity.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.