Regulator's Riddle

Why does SEBI want brokers to acquire a second software vendor?
 Mahesh Nayak        Print Edition: Mar 16, 2014
Jignesh Shah, Chairman and Group CEO, Financial Technologies
Jignesh Shah, Chairman and Group CEO, Financial Technologies Photo: Rachit Goswami

The woes of Jignesh Shah, already in trouble over last years scam at the National Spot Exchange Ltd (NSEL), seem to be multiplying. The Securities and Exchange Board of India (SEBI) has asked stock exchanges to advise stock brokers to do business with more than one software vendor. This will impact Shah whose company, Financial Technologies (FT), offers the trading software ODIN that has more than two-thirds of the trading platform market.

SEBI also wants brokers to enter into agreements with their vendors to keep the source code of the trading software with a third party or in an escrow, so that it can still be accessed if the vendor goes bust.

Most traders on stock exchanges work on wafer-thin margins and acquiring another trading software provider means additional costs they can ill afford. For a small broker with, say, 10 terminals, the cost would be over Rs 10 lakh a year. "For an entity like Geojit, with a network of over 500 offices, the cost could be anywhere between Rs 2.5 crore and Rs 3 crore a year," says A. Balakrishnan, Chief Technology Officer at Geojit BNP Paribas Financial Services. It also presents practical difficulties. "It is like asking banks to install two core banking solutions, which is impossible. You can at best have one core banking solution with other supporting software," he adds. "It is difficult to maintain two software systems since they are never identical. The broking business is purely data driven. If one software system fails, the other cant automatically take the database of the first one and keep the system running smoothly."

But neither is it fair to blame the regulator. The NSEL fiasco, which has left the exchange owing Rs 5,500 crore to around 13,000 investors, has eroded all round faith in Shah, the promoter of the exchange. SEBI is keen on ensuring that in case FT totters, back-up systems are in place. To avoid trading disruption in case one software provider fails, it has suggested keeping an alternative vendor as well.

Shah has told brokers to go to court against SEBI. But legal action may not help

But which vendor would be willing to share? Getting access to design and development specifications from vendors is asking for too much, say traders. "The suggestion to have an escrow account is good, but it is only legal protection. Technically it has no use. This never happens anywhere in the world." says Balakrishnan.

And why has SEBI woken up over seven months after the NSEL scam broke out? "We are taking cautious steps before anything untoward happens in the market. SEBI has to safeguard the interests of investors," says a SEBI official.

There has been no official response from FT on the development so far. Shah has advised brokers to go to court against SEBI, says a trader on condition of anonymity. "There is no legal recourse for software vendors against the regulator," says Jay Parikh, Partner at Verus Advocates. "SEBIs order is in the nature of an advisory. It is not a diktat. Also it is the exchange and not the regulator which has advised the stock brokers."

Rs 2.5 crore The likely cost per year of keeping another trading software for mid-sized brokerages

One of FTs rivals in the trading software market is the National Stock Exchange (NSE) with its own software. NSE has a monopoly over the equities market but FT is the leader in the trading software platform market. NSE has tried hard to attract brokers to its platform offering freebies and improving its software but it has not succeeded in making a major dent so far. SEBIs latest move will benefit the NSE.

There are also market rumours, however, that Shah is close to selling his stake in FT. That likelihood too may have led to SEBIs advice. It is widely believed that a deal may be announced shortly - and that is why, despite Shahs problems, the FT stock has jumped 27 per cent in five trading sessions, between February 13 and February 20, the price surging from Rs 268.50 to Rs 340.60.

It remains to be seen how many brokers actually heed SEBIs advice to tie-up up with two software vendors, given the costs involved.

 

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