Archive for August 3rd, 2018

The Lyon Stock Exchange: The Survival of the Fittest (1866-1914)

August 3, 2018

Interesting paper by Jérémy Ducros and Angelo Riva on this history of stock exchanges in France. We know so little about stock exchange history and even less about regional stock exchanges.

This paper reviews Lyons Stock exchange:

In this paper, we look back at the XIX century France to shed light on effect of competition in the stock
exchange industry. During the XIX century the Paris financial centre plays a central role in the French
financial markets. Nevertheless, six organized regional exchanges do exist along all the second half of the
century. A recent literature started to study the complex functioning of the Paris financial centre as well
as the interaction between its two components, the official Paris Bourse and its OTC rival, the Coulisse.
Nevertheless, a very small literature is devoted to the regional French exchanges.

By studying the interactions between Paris and Lyon, we find that, after the 1881-1882 boom and burst, the
Lyon stock exchange has to struggle for surviving facing fierce competition from the Paris Bourse and main
national banks particularly after the 1898 reorganisation of the Paris financial centre, while the strong activity
of Coulisse before the 1895 gold mines crash had a positive effect on the Lyon one. After the 1898 reorganisation,
the Lyon stock exchange survived thanks to a new listing policy favourable to SMEs and the development of
second tiers market for both these unofficially traded SMEs and unlisted risky (mainly foreign) stocks. On
the other side, the progressive homogenisation of the official market imposed by regulators to enhance their
control over the French securities market acted as force driving trading to Paris: only the facilities the Lyon
exchange gave to the main banks of the financial centre maintained some activity.

At the 25th anniversary of NSE, we should revisit the history of regional stock exchanges. We should try understand the evolution and the decline of these stock exchanges. There will be lot to figure here and will give us a sense of how regional equity capital was raised and deployed by the companies. We will also get to understand the process of how these RSEs competed before the equity markets completely shifted to Bombay/Mumbai…

India’s National Stock Exchange celebrates 25th anniversary…

August 3, 2018

There are just so many anniversaries in 2018.  The defunct Osmania Rupee turns 100, Indian Private Mutual Funds turn 25, Failure of Travancore and Quilon Bank turns 80 and so on.

Even India ‘s National Stock Exchange is celebrating its 25 years in 2018.

Mint edit says” The story of Indian capital market development over the past 25 years has been inextricably linked to the NSE story.” Indeed.

The National Stock Exchange (NSE) opened for business at a time when the Indian capital markets had just been hit by the Harshad Mehta scam, the existing exchanges were in the iron grip of broker cartels and archaic settlement systems were prone to frequent crises. The new exchange was set up in the teeth of formidable opposition. Its combination of technology, risk management and governance was way ahead of its time. The NSE was part of a quartet of institutions that totally changed the Indian capital markets game; the other three were the Securities and Exchange Board of India, National Securities and Depositories, and the Clearing Corporation of India. The four organizations were led by visionary leaders such as R.H. Patil, G.V. Ramakrishna and C.B. Bhave, who epitomized the idea of institution builders. India owes them a lot.

The NSE enters its 25th year of operations later this month. Its success is undeniable, though there have been blemishes along the way. For example, the Competition Commission of India said that the NSE had used its dominance to indulge in predatory pricing in the currency derivatives segment. The markets regulator investigated claims that the exchange had given select brokers preferential access to information, in what is known as the co-location case. There have been heated debates about the governance standards at the exchange, as the former challenger became the dominant player.

Some of the problems arise from the fact that the NSE, on one hand, is a company owned by investors, and on the other, it operates as a public institution. There is an inherent tension in this arrangement. Yet, despite some of the more recent controversies, the NSE has undoubtedly helped transform Indian capital markets over the past 25 years. The agonies of fortnightly settlements, onerous exchanges of physical shares, payment gridlocks and trading glitches are only dim memories today.

It is quite a story.

The article lists couple of challenges/steps ahead which can take India forward in the nest 25 years:

What is the road ahead? The new management at the NSE has an important task since the organization has a central role to play in capital allocation in a $2.8 trillion economy. There are several tasks ahead.

First, there is a need to further develop the market for risk capital, both equity and debt. The latter is perhaps a more urgent problem given the fact that the banking system is in a mess. The NSE will have to help develop deeper bond markets as larger companies become more dependent on corporate bonds, while getting more retail investors to buy government bonds will help reduce financial repression.

Second, more active bond markets will necessarily require ways for investors to hedge their credit and interest rate risks through derivatives. The two go together.

Third, the NSE will have to play an important role in the integration of Indian capital markets with global capital markets. The balance sheets of Indian companies now have a more global flavour even as capital controls persist, as they must in a country with high fiscal deficits, a weak banking system and episodes of high inflation. So, the integration has to be carefully managed.

Fourth, the NSE built its initial success based on its technology platform. It remains to be seen how it adapts to the next wave of technology such as blockchain. The exchange is already experimenting with the possibility of using blockchain for settlements.

Fifth, more enterprises need to come to the bond markets to raise capital. The current conservative regulations restrict access to only those which have a credit rating of AA and above.

The article should have also mentioned that NSE needs to also do a clean up of its own organisation, There is a major scam of NSE Colocation brewing which could further taint Indian financial markets.

Amidst all these anniversaries, one thing is really surprising. There is barely any research which looks at these events from a historical lens. The organisations should use this opportunity to conduct research on all these critical components of Indian financial history…


How to become a good economist?

August 3, 2018

Anantha Nageshwaran on his Gold Standard Blog posts on what it takes to become a good econ:

Yesterday, I began teaching for the fifth year, the Global Macroeconomics and exchange rates course at the Singpaore Management University to graduate students of the Wealth Management programme, 2018-19. The first session is to set the stage for the course, for learning economics, the right approach to learning economic theories. Emanuel Derman says that they are models and models, to him, are approximations. A theory is an ‘explanation of everything’. Economic theories cannot be that. He calls them models.

In the process of preparing for the class, I read the first chapter of the book, ‘A brief history of economics: artful approaches to dismal science’ which I had downloaded some years ago. Ray Canterbury writes well.

Sample these lines:

As important as pure analytics, mathematics, and statistics are, if we know only the tools of the trade, we will be unable to know the place of economics within the broader community of ideas, much less be able to explain it to the uninitiated. We will be unable to engage in the rhetoric of the intellect….

…A broader approach invites readers to range across the neighboring fields of history, philosophy, mathematics, politics, natural science, and literature….

… Historical perspective puts the lie to any claim that economics always is a progressive science—operating, like nuclear physics, outside time and in pursuit of eternal verities.

….We cannot recognize truly new ideas unless we are familiar with the ideas that economists have already explored. And we cannot understand the ideas of the great economists unless we understand the times of their lives.

…..Institutions include formal systems, such as constitutions, laws, taxation, insurance, and market regulations, as well as informal norms of behavior, such as habits, morals, ethics, ideologies, and belief systems.

Hope to see some of SMU students imbibe these ideas….

Milton Friedman interview on methodology, popular writing vs academic writing, his influences and many more things…

August 3, 2018

We just had Prof Milton Friedman’s 106th birthday on 31 July.

I came across this interesting interview of the late Prof which has some interesting discussion on his approach on doing economics.


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