NSEiT – Conflict of Interest?

Should a Stock Exchange be allowed to have a business whose market it can influence by the virtue of it’s being the Market Enabler?

National Stock Exchange (NSE), India’s Numero Uno Stock Exchange has a subsidary – NSEiT which is involved in the development and maintenance of NSE’s IT infrastructure. NSEiT also develops software products ranging from Trading Solutions to Back-Office Solutions to Wealth Management Solutions to e-Learning Solutions. It also manages the online examinations for NCFM.

Among NSEiT’s products are some which are targeted at the Stock Brokers like the Trading Solutions, Front Office Solutions, Back-Office Solutions. With NSE being the Market on which Stock Brokers Trade, NSEiT has an unfair advantage of being able to push it’s products to the Stock Brokers.

Currently Financial Technologies (India) Ltd.’s (FT) product ODIN is the virtual monopoly in the market. But this monopoly has been gained not by unfair means but by being aggressive in pricing and in product features beating bigger competitors like Reuters.

NSEiT has now offered it’s software Front-End Trading Software ‘NOW’ free to member-brokers till March 2011. The objective of offering the product free is to gain market share and later start charging the users. More importantly it is aimed at luring brokers from FT’s ODIN platform.

Now, I will not say this is unfair, if NSE had choosen to offer the software free for life for everybody. But a limited period offer is raising questions about the ethical practices of NSE.

NSE is in direct competition with FT promoted MCX-SX in the currency futures marketplace. NSE has also put FT’s ODIN software in the watch-list for performance issues. This is despite the fact that FT’s ODIN has been in the market for a long period and has been the preferred choice of brokers because of it’s functionality and cost structure.

The actions taken by NSE recently show that it is trying to arm-twist FT into backing off from it’s domain – Stock/Derivative markets.

NSE should actually focus more on it’s operations and making trading experience better for the investors. NSEiT can be used to focus on these issues – Trading & Stock Exchange Management, E-learning, Connectivity, Clearing & Settlement and IPOs (in fact providing a electronic platform for IPOs is a good area for NSE to manage) and vigilance. NSEiT can develop more tools to identify rigging and cartel movements in stock prices.

Is SEBI studying the recent events? SEBI has been silent on this so far. It should come out with a guideline on which businesses Stock Exchanges (or their subsidaries) can do and which they should refrain from.

Read more at BUSINESS LINE & ET 1, 2