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Cover Story

All thanks to the net
Nirmal Jain, Chairman, IIFL tells B&E how technology and Internet have changed the market dynamics and the way we used to trade at stock exchanges
Issue Date - 16/02/2012
Those who have been in the stock market for two decades now, will appreciate the way it has metamorphosed in the last 15 years. In such a short time, we have seen markets leapfrogging from an open outcry floor trading exchange, a close club of all powerful brokers, jobbers and sub-brokers, system of weekly settlement, opaque and rigged badla (financing mechanism) to world class, modern, well regulated, transparent, efficient trading place. Practically, earlier shares were sheets of paper, bids were shouted and trades were scribbled. The Internet brought about a radical change. Shares were dematerialised, bids were punched on the keyboard and trades were matched on the screen.

This was beyond the wildest dreams of the market participants even in the early 1990s. As a result, the typical difference between what the buyer pays and seller gets has come down from 5-7% to 0.5-0.7%. More importantly, trading has become far more easy and efficient. Earlier there were chalked telephone lines where buyers would typically place their orders a day in advance. Physical contract notes and bills would come after a few days and in some cases after few weeks. And today we are now moving on to mobile trading. While equity cult was largely restricted to cities like Mumbai and Kolkata, now geographical borders are not even considered as speed bumps on the Internet.

There were different stock exchanges, huge price differences and buying and selling were at the mercy of the jobber who could manipulate stock prices with legal sanctity. Investors ran all kind of risks; prominent among them included fake share certificates, huge delays, cumbersome paper work of filling up transfer deeds, sending physical certificates, inability to sell shares till they came back after transfer this process could agonisingly stretch for up to three months at times. It was then impossible for authorities to track market manipulation or identify the actual buyers and sellers. Understandably, it was not the place for small investors. In fact, before 1994, the stock market was notoriously known as nothing more than a small closed BSE club which controlled the market. We all know how markets are today, with real time checks on risks, T+2 settlements, almost 100% foolproof with no defaults, dematerialised shares, screen based price discovery et al. All this has been possible primarily due to revolutionary changes in technology, with the Internet being the key catalyst.

Technology and the Internet, while making markets efficient and consumer oriented, have also brought unthinkable changes to the pecking order of the industry. For reasons of evolution, inheritance and pedigree, banks and financial institutions/financial services organisations would evolve and grow over generations. It would not be even thinkable for a new incumbent player to challenge the established organisation and financial services players.

In the history of mankind there have been many disruptive inventions which acted as great levellers for major paradigm shifts. Under the steady state of things, soon the financial services business would be like an FMCG industry or a product like Coke Cola or Lifebuoy. It will no more be easy for a new player to challenge the incumbent and reach a leadership position. In the primitive stages of growth of mankind, the physically weaker and smaller people undertook farming while the stronger and heftier individuals took a part of the produce by doing nothing but providing protection.

With the invention of the gun, the small man and the big man became equal. Similarly, in the financial services like many other industries, the Internet has been the great leveller.


Mona Mehta           

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