The Bombay Stock Exchange: Liquidity Enhancement Incentive Programmes

Case Solution

Nupur Pavan Bang, Khemchand H. Sakaldeepi, Ramabhadran S. Thirumalai
Ivey Publishing ()

In 2013, the Commercial Director of the Bombay Stock Exchange had to make a recommendation on whether liquidity enhancement programs should be implemented in the spot market. The Bombay Stock Exchange, the oldest stock exchange in Asia, had a monopoly in India until 1994, when the National Stock Exchange was launched. When derivatives were introduced to the Indian stock exchanges in 2000, the Bombay Stock Exchange was unprepared and the National Stock Exchange soon conquered the entire derivatives market. In 2011, the Securities and Exchange Board of India approved the introduction of the Liquidity Enhancement Incentive Program for Illiquid Securities in the Derivatives segment. Later, the Bombay Stock Exchange introduced the incentives for various illiquid products in the derivatives segment, but lost profits due to the incentives it paid. Did incentive programs to improve liquidity improve liquidity in the derivatives segment? Is it worth sacrificing profits to gain liquidity and market share? The commercial director was faced with the long-term benefits of liquidity enhancement programs and the advantages of introducing such programs to the Bombay Stock Exchange spot market.

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