Singapore Exchange distressed due to data ban by the Indian Exchange Market

On the 9th of February, the two major exchanges in India, The BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) declared that they would end all licensing agreements with foreign exchanges. They stopped providing live stock prices to The Singapore and Dubai stock exchanges. The volume traded in the foreign jurisdiction has reached large proportions which is dragging liquidity out of the India, which isn’t a good sign for the Indian Exchanges.  

The main aim for this move by the Indian exchanges is to prevent the Singapore Exchange (SGX) from starting stock futures and draining liquidity from Indian markets.  Singapore accounts for a significant portion of the offshore trading in Indian derivatives like stock futures along with the Middle Eastern Finance hub Dubai. Singapore is a preferred destination for institutional investors looking for an exposire to Indian markets because the exchange supports a large number of non-domestic products. With regard to the Nifty, the exchange offers lower cost of transaction and margins than Indian exchanges. The ban is also expected to attract investor interest in the newly setup Gift City in Gujarat (Gujarat International Finance Tec-City) where both NSE and BSE have set up separate bourses.

Soon after the announcement, as the markets opened on Monday, 12th of February, The SGX Nifty fell by over 8.8%, the most it did since the 2008 recession. The Indian markets after seeing a plunge in the stock prices due to the introduction of tax on long term capital gains, moved higher indicating that there was no linkage between the sentiments reflected in SGX and that on the Indian Exchanges. Hence, this tells us that there is no arbitrage taking place between these two markets.

The main question that arises is what was the reason for this decision of blocking out data to foreign exchanges? Is the Indian Exchange market insecure? Well, there insecurity is justified as the trader would prefer buying futures in SGX rather than Indian exchanges for several reasons. Futures are actively traded on the SGX market with a monthly settlement. Also, trading in the Indian market is pretty expensive. In fact, it is the costliest market to trade in. Taxes eat away a significant chunk of the profit that a trader makes. From Securities Transaction Tax (STT) to short-term capital gains tax (STCG) and now even the long-term capital gains tax (LTCG). These taxes reduce the yields of the trader. For the same trade, keeping everything equal, he has a higher yield if he places this order on the SGX. The SGX Nifty also has an advantage of time. It is a 16-hour market as compared to the 5:30 hours for Nifty. Here, traders can use the market to capitalize over an overnight event. A great example for this would be the case of demonetization where the traders in India had no opportunity to exit with the market opening significantly low the next day whereas a trader in the SGX Nifty had an option to close his position before the fall.

Since the SGX Nifty was planning to introduce stock futures which would lure traders and bring in a huge amount of revenue, BSE and NSE went ahead with this move. What impact would this have? The SGX nifty accounted for nearly 4% of the the total revenue of SGX chain and 10% of revenue from derivative products. So, the impact would be pretty huge. But, this wouldn’t stop traders from going through the Singapore route. SGX has various other alternatives to keep the stocks trade running and lure investors.

Banning the SGX from getting access to Indian price data is not necessarily going to solve liquidity problems of Indian Exchanges. Of course, with no other alternative left to gain exposure to Indian derivatives, some of the larger firms will set up shop in India, but what about the rest? If a significant number of firms don't end up on domestic markets, are we hampering the attractiveness of the market as a whole by making it expensive too? We shall know once the ban come into effect.

- Garvit Arora