The battle for market share is hotting up in the stock market space. With the MCX-SX getting clearance to start a stock exchange, the Bombay Stock Exchange, the oldest in Asia, is dipping into its rich history to rehash an earlier informal system that enabled market participants to delay delivery of securities for a fee.
The system was called badla and was widely used before the 1990s to carry forward trades.
Under this system, a financier helps a buyer buy a stock, but the buyer defers taking delivery of the securities until he has cash in his hand. The buyer also pays an interest on the amount borrowed from the financier, which is a fee for the badla transaction.
Both buyer and seller were allowed to use the badla system. The system boosted speculation and liquidity in the market.
It functioned more or less like futures and options.
The system met with a natural death after the National Stock Exchange became operational and people moved to the derivatives segment, which offers more protection as it is under strict regulator scrutiny.
According to a report in Business Standard, the BSE is now planning launch a new derivative product called cash futures spread (CFS).
Unlike badla, which was not adequately monitored, the new product will be less risky and more transparent, the report said. Back-room financing will not be permitted. In the badla system, this was one of the biggest risks.
In the new product, a trader can enter cash and future spread trades in a single order. The exchange will put out a price quote for the cash-future spread of a particular security. Three cash-future spread will be available for trade at any given time in a security for the current, next and third month futures.
At the settlement, the one who has purchased the shares will get the stock at the agreed spread and the other the interest.
In other words, the spread is cost of carry for one trader in the futures segment while it is interest on financing for another trader.
CFS is likely boost healthy speculation and improve liquidity in the market, Alok Churiwala, managing director of Churiwala Securities, has been quoted as saying in the report.