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How to Deal With the Big Paradigm Shift in the Capital Market

By By Neeraj Kulshrestha, Chief Operations Officer, BSE India

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By Neeraj Kulshrestha, Chief Operations Officer, BSE India

Capital markets have been evolving and transforming from simplistic businesses of fund raising and trading to now becoming global, real time and sophisticated with technology, product innovation and changes in the regulatory environment. Social media and Fintech have added a totally new perspective.

 

Some of the key issues that have arisen are :

Information asymmetry: Information about any company, not yet available to the general market, being circulated. Some participants may have information available faster

Manipulation: has become difficult to establish with huge volumes

Volatility and flash crashes: Asset prices fluctuating frequently due to faster information dissemination due to global nature of markets

Global impact of events: the financial crises of 2008 impacted most countries

Innovation: of products has taken complexity to higher levels where valuation and pay-offs are not easy to understand.

 

One of the emerging trends in the debate of the 2007/2008 financial crisis has brought focus on weak banking regulation, weak regulation of the consumer credit markets, securitization and the collapse of the United States sub-prime mortgage sector.

Some of the new risks in the stock exchanges are High Frequency Trading and cyber security threats including hacking. The regulators across the globe have already taken note of these new age risks and currently in discussions with market participants on the measures to mitigate these risks.

There are no easy solutions. Regulators and policy makers need to be technology savvy, more global in their approach, more current in their knowledge of products and processes. A better coordination between global regulators and extensive use of technology can help in faster response.

The Indian economy currently stands at a strong footing with the interest rate rolling downwards, key macro variables like CAD and fiscal deficit mostly under control and the Government's continued push for reforms and ease of doing business. International agencies continue to remain positive on India with an expected growth for 2016 pegged at 7.5 percent. India is likely to gain momentum in the year to come as the results of earlier measures are visible. The key factors which are likely to aid growth during the year are the impact of the executive action addressing systemic issues in key sectors like mining, railways, defense, banking, roads and power. Further, the pay commission suggestion for hikes in payouts for government employees coupled with soft commodity prices are likely to result in a consumption driven growth.

The proposed initiatives by the government across the infrastructure sector, defense, insurance, banking, start-ups etc. have kept the market hopeful of the government's intent of improving the business scenario. India is being considered as the only “bright spot” for investments by global investors.

Economic growth in a modern economy hinges on an efficient and effective financial sector that pools domestic savings and mobilizes capital for productive projects. Absence of effective capital market could leave most productive projects which carry developmental agenda unexploited. Capital market connects the monetary sector with the real sector and therefore facilitates growth in the real sector and economic development.

Capital market offers a variety of financial instruments that enable economic agents to pool, price and exchange risk. Through assets with attractive yields, liquidity and risk characteristics, it encourages saving in financial form. Taking into account the role in the market economy, the capital market occupies an important place, through their specific mechanisms, succeeding to give its contribution to the economic development of the society. The well-functioning capital market is vital in the economy in order to be able to perform an efficient transfer of money resources from those who save towards those who need capital and those who succeed to offer it a higher capitalization; the capital market can significantly influence the quality of the investment decisions.

The capital markets are not restricted now only to the traditional equity products where only large companies could raise capital. The exchanges now offer a separate platform for SME's to be listed (BSE SME platform). This contributes to raising capital, increases transparency and generates capital formation and employment in the economy.

Capital markets play a central role, through the price discovery mechanism, in the allocation of capital among different market players. An efficient and fair price discovery process is seen as a prerequisite for investors’ confidence in the integrity of the markets, their incentives to identify and support the long term performance and ultimately for allocative efficiency. Transparency ensures trust in the market place and provides all market participants to make decisions based on same information.

Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activates the ideal monetary resources and puts them in proper investments.

The following are important points:

1. Link between Savers and Investors.

2. Encouragement to Saving.

3. Encouragement to Investment.

4. Promotes Economic Growth.

5. Stability in Security Prices.

Financial trading has grown from manual to electronic to automate with the use of algorithms in the last few decades. The increased adoption of technology has led to disruptive trends in the current decade and drive exponential growth in newer business segments created within the capital markets (e.g. like additional liquidity that was generated by Algo/HFT players in the last few years).

 

The market will possibly witness some of the following trends:

Open Source Technology Platforms: Open-source technology is transforming financial services because of its power to drive innovation, cut costs, improve efficiency and accelerate speed to market.

Rise of electronic / low touch trading: Investors will need less and less hand holding from brokers and their traders. Low latency trading growth will slow down, given the massive investment required to push it to faster speeds.

Enhanced User Experience: The user experience for traders would continue to dramatically improve with the ease of information access, simpler and automated trading workflows.

Devices interactivity enhancements: As people become more mobile and the technology through cloud and various computing devices (mobile, tablets, laptops) support the ease and continuity of platform access.

Social driven trading: Social networks would play an important role in the trading life-cycle as the information sharing becomes faster, more trust-able and the investor sentiment analysis becomes more feasible through the social platforms.

Rise of regulation: The regulatory bodies will try to control the increase in adoption of technologies within the financial services.

 

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