Understanding Exchange Businesses Through BSE and MCX

Every market needs a place where buyers and sellers meet. Someone has to run that place, keep it fair and collect a small fee on every deal. That’s the whole idea behind an exchange business. Two listed examples show it well: BSE, India’s oldest stock exchange, and MCX, its commodity cousin. Let’s look at how each one works and what moves them.

The toll booth idea

An exchange doesn’t own the shares or the gold that trade on it. It runs the road and charges a toll. MCX’s profile says the large majority of its revenue comes from transaction fees, with the rest from admission fees, subscriptions, terminal charges and interest income. Therefore, higher trading normally translates into more money, while tranquil markets often result in reduced income.

Stall one: BSE, the share bazaar

BSE started in 1875 as the Native Share and Stock Brokers’ Association and Angel One’s profile states that it is the first stock exchange in Asia. In January 1986, it introduced India’s first equity index, the Sensex. In February 2017, it got listed in NSE, a first for an Indian exchange. Besides trading, it runs a clearing arm, an IT unit and a training institute. On its platform, it offers loans, currencies, mutual funds, equities, and derivatives.  Anyone who looks at the BSE Ltd share price is truly keeping a watch on this firm.

Stall two: MCX, the commodity bazaar

MCX deals in futures in bullion, base metals, energy and farm goods, and options began with gold futures in 2017. The profile mentions that it has a market share of about 96.8% of the commodity derivatives market as of December 2022. This included 100% of the trading in precious metals, energy and base metals, with farm commodities being the odd one out at about 22%. It also has a separate clearing company and has plans of an international exchange at GIFT City. The strength of its position is such that many follow the MCX share price as a proxy for commodity trading exposure.

Same street, different weather

Both are listed, and Angel One reveals no promoter positions for either. Retail investors account for about 54.5% of BSE, with domestic institutions at about 24% and foreign institutions at about 21%. At MCX, domestic institutions account for about 51%, foreign institutions about 30% and retail about 19%. Their composition differs, as does their performance, with the numbers below representing net sales for the last four reported quarters.

BSE’s sales grew, and then plateaued. That of MCX shot up, before falling in the latest quarter. While four quarters do not represent a trend, it is possible that the movement in MCX volumes are closely tied to commodity prices.

What to watch

Volumes dominate in trading exchanges, as they dictate commissions, and therefore profits. Next is regulation, for SEBI dictates what can be offered in an exchange. Price is last on the list, but it is nevertheless important. On Angel One pages, the trailing price-to-earnings ratio is about 49.6 for BSE and 54.7 for MCX, both well above an industry average of about 42. These numbers change every day, so track them on the go.

Final thoughts

Exchanges are toll booth operations and volume is the key to their success, as is trust and technology. Knowing what each one is, how it makes money, and what makes its volumes is very important to getting to the bottom of its chances. This note represents general information, and should not be taken as investment advice.