The man behind United Stock Exchange's grand success

Gaurav Arora has been the driving force behind the bourse's spectacular opening. But there are several challenges ahead

Gaurav Arora loves watching Bollywood potboilers. So, ask him about the spectacular initial success of his brainchild -- the United Stock Exchange -- and his answer borrows generously from one of his favourite films: Om Shanti Om.

"Agar aapki niyat achhi ho, to kaynath bhi aapake sath hoti hai (if your intentions are pure, the universe will be with you)," said Arora.

The 50-year-old managing director of Jaypee Capital has enough reason to be on cloud nine these days.

USE's initial performance has beaten the openings of even the best Bollywood blockbusters.

The country's newest bourse got off to a flying start on Monday by clocking volumes of over Rs 45,000 crore (Rs 450 billion) in four currency pairs: rupee-dollar, -euro, -yen and -pound.

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In the process, betting on currency futures, which began two years ago in India, crossed the combined trading volumes of stock and index futures.

Though its volumes tapered off in the next three days, USE still bests by a handsome margin both National Stock Exchange and the Multi-Commodities Exchange in currency futures trading.

The good news is that USE has not captured share from either incumbent, who have both improved their volumes substantially.

"I am very bullish on currency exchanges and huge scope exists for them in India," said Bank of America MD & Country Treasurer Jayesh Mehta.

Madhu Kannan, chairman and managing director of Bombay Stock Exchange (BSE), which holds 15 per cent stake in USE, says Jaypee provided a strong force of brokers for trading on the USE; T S Narayanaswami, USE's MD, got the banks and BSE provided a platform.

This makes USE a unique proposition.

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Arora's firm, Jaypee Capital, which was one of the largest recruiters of IIM graduates last year, had diluted 95 per cent stake at face value to 26 entities, including banks, public sector companies and others, to fall in line with the diversified ownership guidelines of market regulators.

Though he holds just 5 per cent stake now, Arora's role in USE is pivotal.

Even the official address given to the Registrar of Companies for registration of the exchange is an office owned by Jaypee at 1301, Arcadia Centre, Nariman Point.

This property was bought by Jaypee Commodities Pvt Ltd from Francis Pontes Family Trust.

Arora says he sold shares at face value as he was not behind valuations and wanted some of the country's biggest institutions partner USE.

"Money will invariably come, as USE will be a world-class exchange in segments like currency and interest rates, which are much bigger compared to equities globally," he added.

Arora first approached MMTC, country's biggest international trader and needs to hedge against huge currency risk.

MMTC wanted to pick up 15 per cent stake in the exchange, but the demand from banks was so huge that ultimately MMTC had to be satisfied with just 2 per cent.

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Kerala's Federal Bank is another key founder-member of USE.

Interestingly, Federal Bank board member PH Ravikumar was at the helm of NCDEX, once promoted by NSE, until 2007.

He quit NCDEX after a major controversy surrounding trades conducted by Raymount Commodity.

Ravikumar had helped NCDEX maintain leadership among commodity exchanges before MCX started eating away at its marketshare, clocking significant volumes.

The country's top bullion dealer, Prithviraj Kothari of Riddhi Siddhi Bullion, also owns 5 per cent stake in USE. Kothari's company, which runs a spot gold trading platform, is an enterprise worth around Rs 8,000 crore (Rs 80 billion) and a major rallying force for the Bombay Bullion Association.

BSE is, of course, the largest shareholder with 15 per cent equity holding in USE. Analysts say the USE business model is the first of its kind in the Indian exchange space where BSE provides the trading platform and clearing services for its currency and interest rate derivatives products.

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This model has been adopted in many overseas markets.

For example, the New York Mercantile Exchange used the Chicago Mercantile Exchange's Globex platform to offer its energy products on the electronic trading platform.

Earlier, its products were traded on the floor through an open outcry system. Nymex paid CME a fee for its services until, of course, it was acquired by the latter last year.

USE is the crowning glory for Arora, whose firm has been the largest volume provider on all the derivative exchanges, namely, NSE, MCX, NCDEX, MCX-SX.

Arora obviously wants to keep it that way and says while he did play a key role in setting up USE, he has told his desk to trade only on merit.

While Arora is mum on the issue, the market grapevine says that he set up USE mainly to compete with Financial Technologies, which operates MCX. Arora, whose firm was one of the main volume generators on MCX, wanted a partnership (founder-promoter status) in the MCX Stock Exchange.

However, this was denied to him -- something that Arora is deeply hurt about.

After all, Jaypee, with a 150-strong arbitrage desk, churned out an average volume in excess of 100 kg in gold and silver every day on MCX prior to 2007.

The broker was also involved in calendar arbitrage between near-month and far-month contracts and most trades were proprietary.

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Arora, who entered commodities trading in 1979 soon after graduating in commerce, is already onto his next game by becoming a dominant investor in NCDEX, a rival to MCX. Modalities of the deal are being finalised, and Arora hopes to make NCDEX a dominant player once again.

But, in the midst of all the initial euphoria, observers say USE has many challenges before it. For one, there is a view that the volumes are being propped up by friendly brokers.

Consider the fresh open interest created in the market.

The open interest on USE is negligible, moving up from 0.70 per cent of total volumes on the first day to just 1.51 per cent on the third day. In contrast, open interest on the other two exchanges continues to be 20-28 per cent of daily volumes.

Some also point out a conflict of interest. Arora has BSE as a partner in USE, while he will be the single largest player on NCDEX, an exchange where BSE's competitor NSE has stake and where NSE was acting as promoter until recently.

While Arora says he will not be a part of the management and, hence, will be able to maintain a balance between the two, tongues have started wagging.

Observers also say while the support of so many banks will help it in the initial days, USE needs to attract other participants as there is a limit to which shareholders can provide liquidity.