BSE’s bold play: A strategic overhaul to challenge NSE’s dominance in derivatives market

Mumbai: In a calculated move to erode the National Stock Exchange’s (NSE) commanding grip on India’s derivatives trading, the Bombay Stock Exchange (BSE) has rolled out a four-point strategy for structural reforms, sources familiar with the matter reveal. Backed by a former SEBI chairperson and spearheaded by Whole-Time Member (WTM) Ananth Narayan, the plan aims to redistribute market share through targeted changes in expiry schedules and pricing models, potentially reshaping the competitive landscape.

The strategy’s first three pillars have already been implemented, significantly curtailing NSE’s operational flexibility. NSE’s expiry days have been slashed from four to one per week, while the number of contracts offering weekly expiries has been reduced from four to one. Additionally, Bank Nifty contracts have been barred from weekly expiries, limiting NSE’s appeal to high-frequency traders and institutional players who thrive on frequent rollovers.

Now, attention turns to the fourth and final element: the introduction of fortnightly expiries. According to market insiders, BSE’s Chief Business Officer has been actively engaging with stakeholders, pitching a system where NSE handles expiries on two fortnights per month, while BSE claims the remaining two. This alternating structure is designed to guarantee BSE a 50% share in the derivatives segment, effectively forcing a more equitable split of trading volumes. “It’s a divide-and-conquer approach,” said one broker on condition of anonymity, highlighting how this could disrupt NSE’s near-monopoly, which currently hovers around 90-95% in key segments.

The reforms extend beyond BSE and NSE, impacting smaller players like the National Commodity & Derivatives Exchange (NCDEX) and Metropolitan Stock Exchange of India (MSEI). Both have recently secured substantial capital infusions, positioning them for growth. However, to preempt public backlash over market fragmentation, they are likely to align their expiry dates with either BSE or NSE. Allowing independent schedules could double weekly expiry days to two, mirroring the pre-reform chaos and inviting regulatory scrutiny. Industry experts warn that without coordination, the total expiries might not decrease, undermining the reforms’ intent to reduce volatility and speculation.

Complementing these expiry tweaks is a shift to flat pricing and the elimination of volume-based discounts. BSE proponents argue this levels the playing field, as NSE’s tiered rebates had locked in liquidity. Yet, this has come at a cost: brokerage firms report severe revenue squeezes, exacerbated by the recent mandate for daily upstreaming and downstreaming of client funds. “We’re seeing margins erode by 20-30%,” noted a senior executive at a mid-sized brokerage, adding that the changes prioritize exchange competition over intermediary sustainability.

Market participants are increasingly vocal about perceiving these moves as a BSE-orchestrated power grab, facilitated by SEBI’s oversight. WTM Ananth Narayan is reportedly drafting a consultation paper focused on fortnightly expiries, which critics claim is tailored to bolster BSE’s position without broader stakeholder input.

As trading volumes surge post-reforms—BSE’s derivatives turnover has jumped manifold—questions linger on long-term stability. Will this foster genuine competition or merely shift risks? SEBI’s upcoming paper may hold the answers, but for now, the derivatives arena remains a battleground of ambition and adaptation.