Old dogs and new tricks
“You can’t teach old dogs new tricks” goes the adage; but, not according to Cesar. No no, not Caesar of the Rome fame – with a dagger in his back, lying on the floor of the Senate – I mean Cesar Millan – the Dog Whisperer. Cesar is an entertaining and amazing man making millions of dollars on TV, teaching old dogs (yes!) new tricks.
He says dogs are pack animals and that if your pet poodle, or Doberman for that matter, is not behaving, it is not the dog’s fault, but his master’s – for not showing the way; for not giving leadership and direction.
However, we are not here to talk about the man’s best friend, but about “new tricks” or rather, continuing from the previous article (The Fault is in Our Stars – Part 2), why the Sri Lankan capital market, as represented by the Colombo Stock Exchange (CSE), has not seen any progress or new development in terms of what it offers to the capital market; or the companies that are listed in the exchange; or to those wish to invest in it. The CSE is old; in fact, one of the oldest in South Asia, right along with the Bombay Stock Exchange (BSE) of India.
The BSE has however, learnt new tricks; though a little too late, and only when it was compelled to upon the arrival of the National Stock Exchange – a young pup doomed to fail in its eyes and first scoffed at when mooted by none other than SEBI (the SEC equivalent in India) itself. SEBI, frustrated by high commission structures, non-compliance of its wishes, bonhomie between brokerages, and mainly the disinterest BSE showed in upgrading itself to facilitate new demands of the fast expanding Indian economy, helped set up the NSE as a model exchange and broke the stranglehold BSE had on India’s capital market.
Within its first few years NSE outpaced BSE, and now is the top dog in the Indian capital market and the undisputed leader of the pack. Who lost out when competition in the form of NSE was introduced to the Indian capital market? Well, BSE for sure, but who won over the longer term? India, its capital market, the economy, and its people.
BSE, NSE, and CSE
The BSE (until reform was initiated) and CSE (as is now) share notable similarities in that it’s owned by the brokerages. The CSE though operated as an independent body, is a mutualised stock exchange controlled by the brokers for the brokers. The BSE too – till ambushed by NSE – was holding the Indian capital market hostage, but not anymore. Because of its reluctance to change, to modernise, or step up to the plate, it lost out to the new comer.
The NSE is different; it is modelled as a for-profit exchange. No one institute or shareholder can influence it; it is structured that way. There exists operational and organisational independence and separation between the owners, users, and the operators.
The exchange makes its money from the number of transactions – just as CSE does – but not as a default of its existence, but as an objective. Its CEO and officials are responsible to make profit and they strive to increase its revenue, to offer and introduce new and more innovative products, and to broad base market participation.
They are also similarly rewarded for their efforts. Entry into the Exchange is simplified and not restricted to a few. The exchange encourages more transactions to take place, allows proprietary trading which facilitates liquidity in the market, ETFs, index and stock futures and options, and short selling, all of which facilitate an efficient market and true price discovery within the market.
This in turn allows for capital formulation in the economy at lower costs than the banks intermediation costs for doing the same. Capital markets facilitate and create a mechanism for the nation’s savers to invest and participate in its economy.
The banks are vital components of an economy, and compete with the capital market for the nation’s or people’s savings. Banks accumulate from the saver and lends to enterprises and individuals who borrow funds at a higher rate. Banks make money on the spread between the borrowing and lending costs.
In the capital market, enterprises come directly to the people on the basis of profit share; they give ownership and a share of the profit by way of dividends or capital gains which reflect its accruing profitability. One is not better than the other, but different and necessary means to an end, which serve as a vital cog in the economic machinery of any nation.
Why isn’t the CSE learning?
The BSE must lament having lost its top post and its hold on the market. However, India celebrates the freeing of its capital market from the stranglehold of an archaic exchange. Having liberalised the market now, India offers multiple exchanges in which you cannot only buy and sell stock, but also trade indices, stock, and commodities futures and options, a variety of ETFs (Exchange Traded Funds), REITs (Real Estate Investment Trust) etc.
India is feasting on the funds of its NRIs, investment remitted from its Diaspora, plus facilitating FDI via its market mechanisms. India, once not even sailing the same seas of world markets, now boasts two, sometimes three, of its exchanges within the top five exchanges of the world on a regular basis on the number of transactions and volume of trade.
So why then isn’t the CSE learning or progressing along with the rest of the world’s exchanges? Can it not learn new tricks? It cannot be that. In my view, the CSE has within itself, the expertise, talent pool of individuals, and the means and funds to bring forward innovative change. What it lacks then must be the will to bring it on.
Is it then, as Cesar Millan says, the fault of the masters? The owners? Is it about not being allowed progress as opposed to being unable to progress due to a lack of capacity, skill, and capability?
New tricks change the game. New tricks tip the scales, erase lines already drawn in the sand, change the pie, its slices, and who gets what, and how much.
The CSE is owned by the brokerages that in turn are owned mostly by the banks. The capital market and the banks vie for the same savings of the people. What is going to go into the stock market could very well go into a savings account, fixed deposit, or numerous combinations of innovative savings schemes and instruments the banking and finance industry facilitates to the public.
So coupled with the mutualised exchange owned by the brokerages, we have also compromised the capital market by also handing ownership of these brokerages to its rivals, its competitors – the banks.
Though the demutualisation of the CSE has been on the cards for over a decade, it is yet to happen. The economy is the lifeblood of any nation and its capital market is too vital a component to be left in the hands of an obstinate, obsolete, selfish oligarchy.
The Exchange must be granted independence and wrested from the control of the brokerages. Only then shall we see new tricks from this old dog. We need another Cesar.
To be continued…