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'There's huge potential for online trading in India'

On February 6, newswire and financial information giant Reuters, software provider RiteChoice and co-operative EMPIL, a 100-member alliance of National Stock Exchange stockbrokers, tied up for an online broking service. Reuters is to provide the technology and RiteChoice the software for the end-to-end bureau service for buyer Equity Markets Projects India Limited or EMPIL.

The Reuters solution is expected to facilitate risk management, stability and scalability to online stock trading. It would help EMPIL shareholders to execute a trade at any time during trading hours and from any location in the world.

In a group discussion anchored by Y Siva Sankar, Mitya New, managing director and manager (south Asia), Reuters, Rob Knourek, president, Reuters Retail Solutions and S Rangarajan, chairman and managing director, RiteChoice Technologies, evaluate the winds of change blowing across the stock-broking community in India.

How responsive are Indian stockbrokers to proposals for introducing hi-tech in their business?

Mitya New: There is a lot of interest for strong technology. Everyone wants to take an online broking system as fast as possible. These are the times when markets are important. A lot of people perhaps did not realise immediately that they would need a strong technology which is scalable, which will offer a lot of back-up.

Now I feel the brokers are beginning to realise the importance of technology. Among the brokers who contacted us, there were a few who were resistant to technology.

Rob Knourek: We think there is a big replacement market in e-broking internationally. A lot of people have come with very low-end, low-tech solutions which are easy to bog and fill in the market with them.

What they are finding is that with the solutions of their scale, they can't handle large number of Internet users, or guarantee performance. Maybe, most importantly, they are realising these solutions are not capable of expanding to new instruments like e-trading.

So the advantage we are going to provide to the market is a platform that already does all those things. And that's very attractive to people in this market

Some hi-tech stock-broking firms say their customers are steering clear of online trading, after initial euphoria.

Mitya New: We got different feedback. Our feedback from the brokers is that there is a lot of potential. It all depends on the speed with which Internet access is provided all across the country.

There is a lot of potential to access brokers and or industries outside the main cities with Internet technology, which you can't do through physical interactions with brokers and investors.

S Rangarajan: What we bring to the table today is our understanding of the issues involved. The back-office has become primary today. For example, we are moving, without choice, towards a rolling settlement.

By June-July 2001, we will have compulsory rolling settlement in all scrips. We already moved to complete dematerialisation.

There is a big paradigm shift happening in the capital markets, especially secondary markets, today.

The past 10-15 years, even today, only 5 per cent of the trades are done through rolling settlement. That's called voluntary rolling settlement. And we have the balance 95 per cent trades done through what is called account period settlement, which is a five-day settlement.

This is going to change, come what may, by July 2001.

These changes are not mandated by SEBI (the Securities and Exchange Board of India) or the government; they are mandated by global cross-border transactions and our strategic position in the global capital market today.

Changes that have taken place in the last six months -- we have not seen such changes in the last ten years. For example, there are a lot of instruments coming in. Markets have been clamoring for instruments like index futures, index options, equity options. And SEBI says, 'Come take it'. But there are no takers.

Now we have value-based margin systems. We have certain proactive steps taken by SEBI like Client Code being compulsory at the time of voluntary disclosure, even for sub-brokers.

Some of the brokers have taken the stand that a sub-broker is a client of a broker, so it is enough if he gives a code, he doesn't have to give the Customer Code.

But it didn't gel. SEBI has stated very categorically that they have to do it by February 28. Now we are looking at a situation where brokers have to settle their trades in a day, which means, delivery in, delivery out, pay in, pay out, within a day. Most of the brokers' back-offices are not equipped to do this today.

Similarly, the traders -- 90-95 per cent of the retail trades are done by the professional trades today in the country. There is a very strong community of professional traders in the country today. These people used to trade on a five-day trading window where, in a scrip, if the person takes a position on Monday, he has a privilege of keeping it open and doing whatever he wants to till Friday. That system will go from June-July.

Every day there will be a settlement. So there will be a compulsion on the part of the trader to maintain some books of accounts, some information systems, which will tell him: what position, which scrip, which settlement, how to handle that. In addition to that, SEBI is coming down heavily on errant brokers.

So many changes have taken place in the last six to nine months. For example, clients' margins. Until today, brokers were not collecting margins from the clients. Now SEBI says, 'You will to have to collect.' Not only that. 'Report to the exchange at the end of the day which client is not paying the margin and how much.'

Now, we have already seen the shakeout among the stock exchanges which took place in 1994-95 when we had screen-based trading system. Market got into a spin, and now we have only two major exchanges. Regional exchanges have a proxy role to play.

If you look at the strong retail broker, he operates throughout the country. Obviously, the traders and the investors operate through a network of sub-brokers and branches throughout the country. Today, unless they have new integrated back-office system, where -- suppose I am broker in Bombay, and I have a branch in Madras. If there's a trader in Madras, I should be able to access his information in Bombay; I should be able to control risk here and I should be able to report to the exchange in the evening for his trade out here, as to whether he has paid the margin.

Which means, we are looking at an integrated back-office system across multiple entities. This is the challenge.

Now, a broker and a sub-broker are different legal entities. So an integrated system is made up of multiple systems from a legal perspective but a single system from a particular perspective.

Fortunately, we have started working on it. In the last week of February or first week of March, we will release a new version of our system.

So we will bring to the table a system which will enable the traders to use the technology of a global player like Reuters.

Today, look at index futures. It's not taking off essentially because a trader in Madras does not have an option to trade because there is no mechanism that the brokerage has with which they can report. Brokerages have sophisticated trading systems.

There is a paradigm shift happening. In the last six months, the changes in the back-office systems have been so sudden and pervasive -- like Client Code being made compulsory -- that they have turned the whole thing topsy-turvy.

We have a whole lot of companies coming into EC solutions, temporary solutions. People are enlightened. When we go into the market, we can feel the difference. We expect the market is there for ASPs. (Application Service Providers)

Would you offer this package at a flat rate to prospective customers? Or will it vary from one customer to another?

Mitya New: I'm not going to talk about commercial terms. All I can say is that we are offering a service to the Indian broker who wants this kind of service. If they come to us, we will show them how it works. If they decide that it suits their requirements, then we could do a contract and offer this service.

The way to look at it is, brokers today have a choice. They can buy a system, as many have done, and host it in their premises or somewhere, and employ staff, engineers and software specialists, to look after it. Or, if the upfront investment is too heavy for them, then they can prefer to take a service like ours where they don't have to invest in software and technology and expertise. They can use our expertise to run the system by paying a certain service fee.

What sort volumes would make your tie-up with stockbrokers meaningful?

Mitya New: The way we have structured this deal, we will bring in the technology. The whole system is hosted by WiproNet. They will do the data management. So we have a system where all we need to do is to ensure the service is fine. The brokers don't have buy anything else separately.

They don't have to worry about what happens when the system crashes. We are there all times.

So we will have this online broking service all times. We think we have a good potential in India because we are the only foreign provider in India. There are a lot of local developers; we are the only foreign provider. What we offer here is the same technology that we use in America. I think we have an advantage.

We don't know the volumes at the moment. We don't need to worry about the internal targets because the broker takes the service. The broker needs to worry about the volumes. What we are saying is, here is an online broking service, we give it to you, and they pay us something of course... If you want to know what they pay, well, I can't tell you. But they pay us a service fee to use our systems.

How are you going to ensure privacy for the data you gather from different, often competing sources?

S Rangarajan: Privacy is part of the security system we have built up. For example, we guarantee that data of one broker won't be accessed by other brokers. Even the ASP can't access it.

Rob Knourek: Privacy is one of the key requirements. The technology guarantees it. It comes as part of the standard offerings. We do the same in the US.

You call this a stockbrokers' cooperative. The Indian stockbrokers are perceived by some people as a dog-eat-dog world. Can there be cooperation in such a world?

Mitya New: (Laughs). As far we are concerned, EMPIL (Equity Markets Projects India Limited) has come to us and said, 'We would like this kind of contract with you for the service.' We said, 'Fine, we will be very happy to do that.' And we have done that.

And they have told us that they have 100-odd share-brokers in EMPIL from around the country.

S Rangarajan: Today, we are not talking about extending front-office and back-office services because of reduction of costs alone. When we say cooperative, it could probably mean that the cooperation is for not spending a lot individually. It's for the combined spend. I don't think they will cooperate in business, right?

Whom do you perceive as your competitors in the Indian market?

Mitya New: There are a couple of local competitors. Financial Technologies has been very successful in rolling out systems for back-offices. We know that there are other parties who are also active. We don't see any foreign companies, for a change.

We already have established business in India in the financial markets, we've got a strong brand name because we've established a strong relationship with RiteChoice which is very strong in the back-office area of the brokers' market.

Do you think the market is big enough for more than three players?

Mitya New: I think the market will expand very rapidly. So I think there is room for more players. How many players? I don't know. The market will tell.

S Rangarajan: Our market is going to take off in a big way because the cost of systems today, in the light of what's happened in the last 6-8 months, has gone up substantially. And brokers' rates will go down substantially.

We are already talking of three-digit brokerage -- it might go to four digits, in which case you will have to have huge volumes to clock your silver, turnover and brokerage value; but you have to meet the cost.

We believe that if we have a ballpark classification of brokerage houses into A, B, C, D or some groups, there is a viability sector of large number of brokerage houses -- let's say 300 or 400 brokerage houses -- who would be viable only in the ASP model.

Essentially because they can't afford to have systems; they can't afford to fail to settle their trades on a particular day. The next day they can't trade, they can't settle. The whole thing goes haywire.

Do you think too much is happening too soon in India?

S Rangarajan: No. These changes have been on the anvil for the past three years. But as usual we were not able to see. This paradigm shift that has already happened elsewhere, in the US markets, for instance.

When we wanted index futures, we knew that it would also mean daily settlement. But we didn't realise the impact of daily settlement in our business model.

I'm talking from the viewpoint of the brokerage community. Now, it suddenly dawns on me (broker) that this needs daily settlement, I am not prepared for a daily settlement system because the sub-broker has his own systems. I have some other system.

Today, our trading systems are connected, but back-office systems are not connected.

We will have to have an end-to-end connectivity. Our back-office systems should again send some information to front-office system to ensure that it's one whole system.

That's where we feel that, by working very closely with Reuters, we will be able to offer the broker one system that will give him everything.

If it's not there, it's going to be very difficult. If you have an excellent back-office system but if your front-office system is very slow, it's not going to work.

I don't think there is going to be any dilution in all these requirements because these are international requirements. There is an organisation called IOSCO -- the International Organisation of Securities Commissions. They have released a document in January 2001. The document is available on their site www.iosco.org.

This document is about recommendations for securities settlement systems for the next 3-4 years.

There they are very clear. These things have already happened elsewhere. For example, one of the recommendations is that no exchange can go in for a settlement which is anything more than 3+3. The world over, people are moving towards 3+1. Now we are talking about 3+5 for 5% of trades. The balance 95% are going through account period settlement of Monday to Friday.

So obviously, the existing systems have no place. It's just a matter of time, probably 3-4 months, probably six months. And when it happens, we will be there.

When did you realise that India is a potential market for you?

Mitya New: I think it was last year. That's what everyone would say anyway. The moment online broking was made possible by SEBI in India, which was in February last year, everyone made their decision. We had done some market research to see if prospective clients are interested, and started offering our service abroad and in India. We signed out first contract with Apeejay in December last year.

This is our second contract and a very important and large one. We are very confident this will expand and increase our speed.

Have you discerned any interesting pattern among Indian stockbrokers vis-a-vis their counterparts elsewhere?

Rob Knourek: I think this is a new market. A lot of these guys are moving pretty quickly to establish their online presence. It's somewhere... maybe to where the US was 15 years ago or maybe Italy was four or five years ago.

But talking of customers and people in the market, I think we can see it's going the same way. There're going to be a lot of new entrants in the market, there is going to be lot of focus on customer acquisition. Lot of these guys have... from acquisition to customer retention issues, and they are going to start off with their services for such customers.

I think, from what I have seen and heard in the markets, that it is going to be very similar to the US and Italy. There are always local idiosyncrasies.

S Rangarajan: I'd like to add a point. We Indians have demonstrated in the last ten years that we have a certain streak of unpredictability in us.

I've had the opportunity to work with international experts on capital markets. There is a gentleman who was involved seriously in capital market operations in Bill Clinton's government. I'd the opportunity to interact with him. That was when we were planning to introduce depository services in India.

He was very sure that India would take 'n' number of years. We took 1/5th of that. It's amazing. I met him a few months ago and he said, 'I don't understand your country. Suddenly, you accept something.'

Now, you take screen-based trading. Suddenly, we accept. We just accept. We have 3,000 scrips across our large, diverse country. Some 85 per cent of them have already been dematerialised. We gone straight to dematerialisation, not demobilisation. It's very successful.

We've had any problems. So far, not once did NSDL (National Securities Depository Limited) shut off their operations for even a day. We've had hiccups, but... you know, probably because we start very late, we have all the mature systems coming to us.

In terms of mental attitude, I believe that when all this happens, then people suddenly realise that unless they go in for a shared service, their cost of operations won't be sufficient enough to make them profitable.

What distinguishes India is that, elsewhere processes are gradual. But we don't seem to believe in that. Zoooooom (gesticulates with his right hand to draw an imaginary picture of an aircraft taking off), one shot, and we go there right up. Sure, we go the last. On a scale of 100, we don't care for 1 to 90. But from 91 to 100, we just jump up.

In December 1999, Reuters's decision to offer 2000-2 software to banks for inter-bank forex deals created a furore among brokers. Do you rule out such resistance this time from stock-brokers?

Mitya New: We launched software 2000-2 in April 2000 which is aimed at forex trading community. This is a service that automatically matches buy and sell orders.

There was some commotion in the sense that brokers who were in the market then understood it as a competitive threat.

We were a competitive threat because the service that we are providing between buyers and sellers in a market... actually means it is something we are able to provide with technology. The service is doing very well, it's successful.

It's better to see that service as a fraction of a development of the market. We have it in various forex markets around the world. And it is very good in building liquidity. Across the market it is growing in sophistication here.

In the interest of the financial community, it is a good thing. That's why we even have the backing of the RBI.

Did you choose the NSE brokers for any particular reason for this tie-up?

Mitya New: We did not choose the NSE platform. All we have done is provide an ASP service, a bureau service to people who sought it. In this case, EMPIL represents 100-odd NSE brokers. Tomorrow, if some other organisation representing BSE brokers comes to us and seeks our services, we will offer them our services.

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