The ongoing liquidity crisis at the National Spot Exchange Ltd (NSEL) has reignited the debate on the conflict of interest between the commercial and regulatory roles of an exchange. It also seems to have led policymakers to revisit the issue of exchange regulations to find ways to minimize, if not eliminate, such a conflict. A working group set up by the government in the wake of the crisis has called for ownership restrictions that prevent one corporate entity from dominating any one exchange or even a group of exchanges across different segments. The renewed policy focus on the inherent conflict of interest in the exchange business—the exchange derives its income from members it regulates—is welcome. There are several problems with the current approach. First, efforts in other markets at erecting Chinese walls have only demonstrated how porous they turn out to be in the hands of clever practitioners. Second, even ownership restrictions can be rigged by manipulative owners to their advantage, on their own, or in collusion with other owners. The threat of fragmentation lowering liquidity was blunted by compulsory smart order routing that forced market intermediaries to route trades to the location that offered the “best” deal. The evidence so far seems to suggest that new risks stem from dark pools and unregulated exchanges rather than the regulated ones. The systemic risk posed by the conflict of interest in the exchange business is too large to be ignored but that still does not justify a monopoly in the exchange space. The NSEL crisis can serve us well if it leads to fresh thinking on these issues, and results in a more robust and dynamic framework for financial regulations in India.
Posted on: Sun, 29 Sep 2013 06:48:46 +0000
Trending Topics
Recently Viewed Topics
© 2015