Synopsis: NSE widened its lead over BSE in February, raising the derivatives market share to 70% while BSE slipped to 30%. With BSE’s ADTO falling 21% versus NSE’s 7% decline, traders shifted toward deeper liquidity and tighter spreads, reinforcing NSE’s dominance despite overall industry volumes contracting.
The two major stock exchanges in India, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), have been competing with each other for market dominance. Although BSE is the oldest stock exchange in Asia, NSE has been increasing its hold in the derivatives market. The data available for February indicates that NSE is further widening its lead over BSE, whose volumes have dropped considerably.
Why Has BSE Lost Market Share?
The market share of BSE’s derivatives contracts reduced to 30% in February from 33% in January, showing a drastic slowdown in momentum. The slowdown was primarily caused by a contraction in options and futures business, with the overall industry notional options ADTO (Average daily turnover) declining by 14% month-on-month. However, BSE’s contraction was more drastic, with its ADTO falling by 21%, showing a steeper decline than the industry trend.
Even in the futures business, BSE experienced a 20% decline in ADTO on a month-on-month basis in February so far. This shows that not only was the trading volume affected by the slowdown in the market, but there was also a preference shift towards other exchanges relative to BSE. As a result of reduced liquidity, traders tend to hold their positions on the exchange with higher liquidity, and BSE seems to have suffered the most in this case.
The decline also shows that BSE’s derivatives business is relatively more vulnerable to volume fluctuations. As a result of liquidity following liquidity, even a slight contraction in volume can cause a drastic contraction in market share, especially when competing with a larger exchange.
How NSE Outpaced BSE Despite Being Younger
NSE was able to raise its market share to 70% in February, up 2% from the previous month, making it evident that it was able to absorb the volumes that moved away from BSE. While industry options ADTO dropped by 14%, while NSE’s ADTO dropped by only 7%, showing greater resilience and ability to retain liquidity during difficult times.
Being the younger exchange, NSE has always been the leader in terms of derivatives liquidity, speed of execution systems, and institutional participation. When volumes are dropping, traders tend to move to exchanges with lower spreads and higher participation, thus making NSE the leader again. The February numbers again prove that NSE is the stronger exchange and that BSE is struggling to retain its market share in the derivatives segment.
In addition, NSE enjoys strong network effects in derivative markets, especially in index options and futures contracts, in which it has a substantial market share. The more participants in the proprietary, institutional, and algorithmic segments, the tighter the bid-ask spreads and the better the price discovery. This fuels a positive feedback loop: more participants are attracted to better liquidity, which in turn reinforces liquidity, enabling NSE to maintain its lead even in a slowing market.
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