Monday, February 29, 2016

Why do we have multiple stock exchanges?

Have you ever wondered why are there multiple stock exchanges listing several same companies in the same country? In India we notice there are major stock exchanges NSE and BSE. Wasn't anyone of them sufficient to get the job done? Here's an explanation.

Bombay Stock Exchange and National Stock Exchange are both private companies. Sometimes people assume they are government organizations like the Reserve Bank. Think of stock exchanges as eBay or your favorite shopping website. You can buy the same book published by the same company through multiple shopping websites. In the same way, you can buy Infosys stock through multiple stock exchanges.

How many shops can you have? Many. As long as you have customers and suppliers. Same for the number of stock exchanges. As long as you have companies trying to sell their shares through you and traders trying to buy the shares, you can run a profitable stock exchange. We still have 21 although most are very small or irrelevant.

Would you rather have just one Flipkart or have competition from multiple shopping websites so that the commission charged by the website is low? I would prefer multiple websites so that I could pick and choose.

BSE is the older company dating back to 1875 and by 1992 the government found that it was slacking. BSE had no competition back then and its brokers were a closed group of merchants. There was very little technology, transparency or openness. That was not good for country that was just opening up.

Next: What was it like to trade stocks before electronic trading took over.

Thus, in 1992 Narasimha Rao prodded a bunch of government companies such as LIC, IDBI and SBI to create a new stock exchange company with the best of technology available and a much more open system of admitting brokers. Anyone with expertise could become a broker in this new company and not just some nephew of a powerful Dalal street merchant. This new exchange also provide better data on the prices and thus it became quite easy for ordinary traders to enter the stock markets.

Source: Quora answer by Balaji Viswanathan

Ashish Agarwal
Posted By Ashish AgarwalMonday, February 29, 2016

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