It uses two fundamental stock exchanges, namely, the National Stock Exchange and the Bombay Stock Exchange, in effect on the Indian equity market. Both enable trading but the volume of trading on the NSE has invariably been much higher than on the BSE. To understand the reasons for these differences, an analysis of market structure, behavior of investors, and mechanics of trading would be necessary. Before that, let us first get back to basics, such as the full form of the NSE and its significance in the Sensex.
NSE Full Form and Market Function
The NSE full form is the National Stock Exchange. This was established in 1992 with a cause to create a clear-technology driven market place. It also established electronic trading in India that replaced the traditional open outcry system, thus opening up a wider base of participants. Its benchmark is the Nifty 50, which tracks the 50 large-cap companies across various sectors.
Sensex and the Role of BSE
The BSE, or Bombay Stock Exchange, has a history dating back to 1875, making it thus the oldest stock exchange in Asia. For its benchmark index, the BSE uses the Sensex, which encompasses 30 financially strong companies in the key sectors of the Indian economy. The Sensex is usually used as a barometer for overall market sentiment.
Both exchanges are recognized by the Securities and Exchange Board of India (SEBI) and provide equities, derivatives, debt instruments, and exchange-traded funds. But, apart from all these similarities, they leave much of a trading volume difference.
Historic Development and Adoption
Particularly in the history of both exchanges, one of the factors is where BSE used to be a very traditional floor-based exchange and NSE started directly with a fully automated electronic system. Faster trade execution, real-time updates, and fewer manual errors quickly attracted investors to this model.
Investor Participation and Liquidity
Liquidity is an important aspect in defining one’s trading volume. Liquidity defines how quickly an asset can be bought or sold without impacting its price. Higher liquidity on the NSE attracts most traders who thus put themselves into a cycle of increasing participation. Retail and institutional investors usually prefer exchanges, such as the volume and cost of bid-ask spreads are low, and orders can easily confirm execution.
The BSE, even though it is very efficient, has low liquidity when compared to the NSE for equity trading. This imbalance ensures and states that most of the time traders, particularly those who deal with derivatives, would execute on NSE when they are going for buy or sell orders.
Impact of Derivatives Market
The overall trading volume of any exchange is augmented significantly by the derivatives segment. Futures and options contracts on indices and stocks see high demand among traders, hedgers, and arbitrageurs. The NSE predominantly leads on derivatives trading with popular instruments like the Nifty 50 index futures and options.
Market Perception and Indices
Indices are very essential parameters that allow traders and investors to benchmark their investments. As a market indicator, the Sensex has significant emotional and historical value. The Nifty 50 is generally the mode of measuring performance against the benchmark of portfolio managers, mutual funds, and foreign investors. Most of the large institutions trade and follow on the Nifty, keeping volumes at a very high level on the NSE.
Both indices, however, indicate the well-being of the market, but greater attractiveness for the Nifty 50 in derivative contracts and exchange-traded products strengthens the role of the NSE in daily transactions.
Corporate Listings and Trading Choices
Interestingly, a company’s shares can be listed on both exchanges. On the other hand, a trader will usually prefer buying and selling orders on the exchange that provides such liquidity. A stock may be available in both BSE and NSE, and still, the volume tends to skew towards NSE as most investors feel confident to trade that way, assuring in fast execution and little slippage.
NSE vs. BSE: The Main Cause of the Discrepancy in Volumes
There are various causes that explain the disparity in trading volumes when comparing NSE with BSE:
– Early adoption of technology by the NSE.
– Strong presence in the derivatives market.
– Higher liquidity and narrower spreads.
– Institutional preference in favor of NSE benchmarks like the Nifty 50.
– Perception by retail investors of being efficient and fast.
Indeed, these factors, together with one another, can create a self-perpetuating cycle in which adding more trading activity attracts to the offering of the NSE all-in-all while at a much vital but still less role in terms of daily volumes played by the BSE.
Conclusion
The Indian stock market is a dual exchange setup, i.e. NSE and BSE comprise primary equity and derivatives trading platforms.
