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Comparative Study of Stock Exchanges

This section includes an evaluation of various macro indicators of the stock markets around the world, and a comparative analysis between the Indian stock markets and its global counterparts based on these indicators. The analysis is done on the basis of stock market capitalisation to GDP ratio, stock market turnover ratio, number of listed companies, electronic order book trading and negotiated trading. In electronic book trading, ownership of shares is automatically transferred through the exchange’s electronic order book system; in the negotiated trading ownership of shares is transferred through a bilateral negotiation and at a derivative volume and value.

Stock market capitalisation to GDP

Market capitalisation represents the aggregate market value of all shares outstanding in a stock market. It is the product of market price and the number of shares outstanding at a given point in time. The size and growth of market capitalisation is the most widely used indicator to assess any country’s stock market. Market capitalisation acts as an important indicator when adjusted with the Gross Domestic Product (GDP) and also has a positive correlation with GDP. The ratio is an indication of whether any market is overvalued or undervalued. Historically, it is perceived that stock market capitalisation to GDP in the developed economies relatively depicts higher valuations than developing economies.

During the bullish phase of 2007, China recorded the fastest increase in the stock market capitalisation to GDP ratio; its ratio rose by around 118.5% and was followed by India, whose ratio went up by 47.8%. Both India and China’s stock market capitalisations surpassed their respective GDP at a ratio of 112.7% and 131.8%. The seven developed countries (that were considered for the analysis) collectively recorded an average ratio of 114.1% and grew by 7.3%. On the other hand, BRIC nations (Brazil, Russia, India and China) collectively recorded an average ratio of around 105.9%, but the ratio grew at a much faster rate of 53.2% than the developed nations. Among the developed countries Canada’s ratio was 147.4% followed by the US’ at 143.6%. The respective ratios of Japan and the UK were 105.8% and 141.4% and had in fact decreased by 3.5% and 2.9%, respectively. Brazil amongst the emerging BRIC nations and Germany from developed nations recorded the lowest ratio of 79.3% and 57.1% respectively.

Stock market turnover

Stock market turnover ratio is the value of total shares traded in the market divided by market capitalisation and signifies the trading depth, that is, the liquidity position of the stock market. The turnover ratio includes prices in both the numerator and denominator; therefore it is not affected by movement in prices. Any increase in the ratio reflects an increase in trading activity. The ratio helps to distinguish stock markets that have large market capitalisation but lack depth in the market (that is, stocks traded infrequently) from the fully developed markets. It also indicates the diversity of market participants; higher the ratio better is the diversity. Exchanges with a higher turnover ratio also enjoy a much lower impact cost, which is the difference between ideal price and actual price at which a transaction takes place, as presence of large number of buyers & sellers leads to better price discovery.

The above chart indicates that the stock turnover ratio in developed markets is comfortably above 100%. The highest stock turnover ratios were registered by the UK and US at 267.7% and 214.8% respectively in 2007. The UK also registered the highest growth in ratio at 118.4% during the same year. In the BRIC nations, China was the only country that recorded a stock turnover ratio of above 100% during 2006 and 2007. China also registered the highest increase (77.4%) in the ratio among the BRIC nations; the lowest ratio came from Brazil at 56.1% and among the developed nations from Canada at 84.2%.

India, on the other hand, recorded a negative movement in its stock turnover ratio; its ratio fell by 9.2% to 83.9% in 2007 as compared with its 2006 figure. The fall could be attributed to the concentration of trading in fewer stocks and lower free float because of higher promoter holding in companies. Out of the 4,921 companies listed on the BSE in Dec 2008, 1,829 or 37.2% of the companies were illiquid; during the same period on the NSE, out of the 1,406 listed companies, 397 or 28.2% were illiquid. This has proved to be a major hindrance for retail and institutional investors as the impact cost has been on the rise due to the higher percentage of illiquid stocks in the Indian markets.

Listed companies

As indicated in the above chart, the BSE has the largest number of listed companies (4,921), followed by the TSX Group (3,841). The number of companies listed on the NSE increased by 21.6% to 1,406 in 2008 as compared with the 2006 figure.

The London Stock Exchange had the highest number of foreign companies listed on its exchange (681), which constituted 22% of the total number of companies listed on it; followed by the NYSE Group with 415 foreign companies, which represented close to 14% of the total listed companies on it. In terms of percentage share, Luxemburg Stock Exchange had the highest percentage of foreign companies at 87%, followed by Singapore Exchange at 41%. The two main exchanges in the US, Nasdaq, and NYSE Group, had a combined total of 5,963 companies, out of which, 751 were foreign companies.

Electronic order book trading and negotiated deals value

Globally it is evident that the electronic order book trading system dominates the total share traded value, but selective markets have shown that negotiated deals have been making reasonable contribution too. The US registered the highest total share trading value at US$ 70,084.85 billion, of which 74% came from electronic order book trading. The total trading value of the UK was US$ 6,473.61 billion, and negotiated deals contributed 40% of the total trading value. In Asia, Japan recorded the highest share trading value at US$ 5,820.65 billion, and electronic order book trading had a dominant 94% share in the total trade value. Japan was followed by China at US$ 5,457.66 billion. India recorded a total share trading value of US$ 998.08 billion, out of which only US$ 2.01 billion shares were traded through negotiated deals.

Equity derivative indicators

The global derivative trends are quite diverse from the derivative trends in the Indian equity markets. Globally index and stock derivative volumes are dominated by options contracts, unlike India, where index and stock derivative volumes are dictated by futures contracts. In 2008, total number of equity derivative contracts traded globally grew by 19.1% to 11.1 billion as compared with 2007 figures. The highest growth in 2008 was seen in stock future, which grew at 59.7%. Index and stock options contributed 71% of the total contracts traded globally.

The total number of equity derivative contracts traded in India in 2008 grew by 53.5% to 592.5 million as compared with 385.9 million recorded in 2007. The highest growth was recorded in index options, which grew by 186.3%, followed by index futures that saw 42% growth. Stock and index futures contributed a total of 73% to the total contracts traded.

The notional turnover of Indian equity derivative markets for 2008 stood at US$ 2,698.8 billion, a fall of 9.8%, compared to 2007 figures of US$ 2,991.9 billion. Stock futures accounted for US$ 1,032.6 billion worth of trade, which saw the highest fall of 39.8% over 2007. Index options, on the other hand, recorded a turnover of US$ 673.2 billion, up by 114.2%.

Equity derivative performances of exchanges

In 2008 the highest stock options contracts were traded at the International Securities Exchange at 989.5 million, followed by Chicago Board Options Exchange with 933.9 million trades. In Europe, EUREX registered the highest traded contracts at 349.3 million for a notional turnover of US$ 1,549.71 billion. In Asia, Hong Kong Exchanges registered the highest contracts at 54.7 million.

In stock futures contracts, Johannesburg Stock Exchange Ltd recorded the highest number of contracts at 420.3 million followed by the National Stock Exchange, India at 225.8 million trades. It also recorded the highest turnover at US$ 1,032.6 billion, while EUREX registered the highest turnover in Europe at 652.2 billion US$.

In Index options, Korea Exchange was the leader in terms of both number of contracts traded and turnover; its respective figures were 2,766.5 million trades and 44,307.9 billion US$. In Europe, EUREX recorded the highest trades at 514.9 million and turnover of US$ 24,441.3 billion. The National Stock Exchange, India registered 150.9 million contracts traded for a turnover of US$ 673.2 billion.

In the Index futures category, the CME group recorded the highest traded contracts at 882.4 million and a turnover of US$ 54,638.1 billion. EUREX was again the leading derivative exchange in Europe for Index futures with 511.7 million trades and US$ 33,263.9 billion in turnover. The National Stock Exchange, India recorded the highest number of traded contracts in Asia at 202.4 million trades whereas Korea Exchange registered the highest turnover in Asia with US$ 5,602.3 billion.