Exchange Industry Sheet

Industry Sheet - Indian Exchange Industry - As on 10 June 2021


Customer Segments

Customer Segments for Exchange industry in India can be divided as –
1. Instrument type – cash, currency, bond, commodities and so on.

2. Different Participant types – Proprietary, Retail and Institutional Market Participants.

3. Sector wise Issuers – finance, infra, manufacturing etc

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Customer Gains and Pains

Products and Services

The Exchange industry offers services in various segments. The detailed product offering is represented in the above extract. These broad segments are:
1. Cash market
2. Derivatives
3. Debt Market
4. Trading Service
5. Index Service

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Activities and Participants

Value Chain

Major Activities to be performed while operating an exchange business are as follows:
1. Manage Operators, other participants & shareholders
2. Trade execution, Delivery mechanism, clearing & settlement system
3. Warehousing, receipts & logistics (for commodity exchange)
4. Legal & Regulatory Compliance
5. Information Management & Data analytics
6. IT and systems management
7. Client Relationship management

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Industry Map

Demand- Supply Scenario

Demand of exchange industry is directly linked to the growth of the capital market business. These include
1. Primary capital market – listing business
2. Secondary capital market – transactions of instruments

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Industry Characteristics

Market Size

Market Size of Exchange Business is directly related to turnover in underlying assets –

Turnover of Equity Cash Segment: Rs 96,59,735 Crore
Turnover of Equity Derivative Segment: Rs 34,47,95,160 Crore
Turnover of Currency Derivative Segment: Rs 1,63,82,993

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Market Stability

The Revenue Share of Different companies takes time to change. As a result, Exchanges are a Stable Industry

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Pricing Power

The selection of Exchange is related to liquidity of a particular asset rather than Exchange Transaction Charges.

So, exchange with liquidity has high Pricing Power.

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Competitive Life Cycle

Industry is in Stable Growth Stage. This is because of the following characteristics, which are observed in industry –
1. Stable Growth in Sales
2. Stable Profit Margins
3. Rise in Volume & Turnover
4. Stable Increase in No. of companies listed on exchange.
5. Strengthening Broker Channel

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Disruptive Forces

Alternate Trading Systems possess disruptive threats for Exchange Industry. Alternate methods include –
1. Electronic Communications Network
2. Dark Pools
3. Cross Networks
4. Call Markets
5. Blockchain Enabled Exchange

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Major Innovations in the Exchange industry include the followings
1. New & alternate revenue streams (hosting platform, raw transactional feeds, analytical models etc)
2. ‘Retail-like’ customer experience
3. Enhanced & automated control
4. Run by augmented workforce
5. Focus on new age products
6. Supported by next generation scalable architecture

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Indian Capital markets are regulated and monitored by:
1. Ministry of Finance
3. RBI

Key rules & regulations to follow are-
1. Depositories Act, 1996
2. Securities Contracts (Regulation) Act, 1956
3. Securities and Exchange Board of India Act, 1992 and
4. The companies Act, 2013

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Porter's Profit Forces

Supplier Power

Buyer Power

Threat of Substitution

Threat of New Entrants

Threat of Competitive Rivalry

Source – ZebraResearch

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Financial Health of Companies in the Industry

ROE and DuPont Analysis

ROE = Profit Margin x Asset turnover x Leverage
BSE Ltd (FY21) – 22% x 0.14 x 1.84 = 6%
NSE (FY21) – 71% x 0.21 x 2.51 = 38%
MSEI (FY20) – (-124%) x 0.02 x 1.61 = (-14%)
MCX (FY21) – 46% x 0.2 x 1.76 = 16%
NCDEX (FY21) – (-10%) x 0.14 x 2.04 = (-3.0%)

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Investment Needs

BSE Ltd – High CFO Producing Ability, low CFI requirements.
NSE – High CFO producing ability and very low CFI needed.
MSEI- Negative CFO and CFI all through the years.
MCX – High CFO producing ability with low CFI requirements.
NCDEX- Low CFI requirements. CFO keeps varying.

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Trends in Industry

Major Trends observed in the Exchange industry are:
1. Shift from physical to digital assets
2. Decrease in Investments in FDs, Bonds & cash.
3. Rise in Mutual Fund Investments
4. Rise in outstanding corporate bonds
5. Rise in global annual future & options volume
6. Rise in global commodity derivative market
7. Shift in Equity Cash Segment & Equity Derivative Segment turnover from BSE to NSE
8. Increasing contribution of trading from Tier-2 cities

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Industry Specific Risks

Major Risk Factors that Exchange Industry deal with are:
1. Low liquidity within exchange
2. Insufficient system capacity and system failures
3. Risks due to macro-economic factors
4. Credit Risk
5. Regulatory restrictions
6. Perceived lack of attractiveness of Capital markets
7. Government policies on foreign ownership in Indian securities

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Growth Factors

Factors that indicate a healthy growth in the Exchange industry are
1. Increase in number of listed companies
2. Shift from physical assets to financial assets (eg. mutual funds)
3. Increase retail participation
4. Govt approval for EPFO to invest in equity market
5. Growth of data related business
6. Development of corporate bond market
7. Development of International Exchange

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Variables for success in Industry

Stock Exchange
•Number of listed companies, ETF/Closed ended MF (leads to rise in one time & Annual subscription fee)
•Increase in Market capitalization
•Increase in Investors/Traders, brokers, intermediators & Data vendors
•Increase in velocity (turnover/free-float)
•Network Benefit (Liquidity within exchange)

Commodity Exchange
•Increase in products introduced
•Increase in market participants
•Volatility in prices of commodity
•Increase in volume/turnover by existing and new players

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