NEW YORK STOCK EXCHANGE

[This was my last column for Business Standard, published on 24 June 2003. I was sad when I was eased out.]

Where are all the jobbers gone?

The Wall Street Journal reported on a curious row in the New York Stock Exchange. A buyer complained that the NYSE broker made an improper profit of $15,000. The buyer had placed an order for 50,000 shares of Georgia-Pacific Corporation. The broker bought 20,000 shares at the sticker price of $16.40, and sold 30,000 of his own holdings to the client at the same price. Thirty seconds later, the sticker price was $15.90. The buyer complained to NYSE that the broker had made 50 cents on the shares he sold.

How did the broker come to have shares of Georgia-Pacific to sell? He was a “specialist” or a market maker; anyone who wanted to buy or sell Georgia-Pacific shares went to this broker. He was prepared to buy and sell shares of this company – and in order to be able to do so he held a stock of them.

This system would not be unfamiliar to those who know the London Stock Exchange, or indeed the old Bombay Stock Exchange (BSE). Both distinguished between brokers, who went on to the floor and executed their clients’ orders, and jobbers, who specialized in the shares of particular companies. Why the distinction? Because there were times when the flow of orders into the market was too thin and buyers could not find sellers and sellers buyers at the price on the board. Under those circumstances, the price might move a lot before a buyer or a seller could be found – that is, prices would be volatile. And the greater the risk of large, inexplicable price fluctuations of a share, the less prepared investors would be to hold it. Its price would be more stable and market larger if some broker was prepared to hold stocks and smooth out price fluctuations. Market makers or jobbers enabled an exchange to deal in shares of smaller companies. This is how they emerged in many markets.

If a market maker is legitimately holding stocks and offering them to all comers, there is nothing to prevent him from buying cheap and selling dear. Only competition can prevent that; the fewer the specialists in a stock, the greater the chance that a market maker can use his monopoly to make unjustified profits. To prevent that, market makers generally work on preannounced margins; the difference between their bid and offer price is higher than the market average. The higher margin compensates them for holding stocks.

But once trading goes electronic and anonymous, it becomes difficult for  a few market makers to earn higher margins. Orders are being continually entered on the electronic screen; as soon as a bid and an offer price coincide, the trade is made and recorded. Orders no longer get concentrated in the hands of known market makers, and they cannot maintain large margins. The dispute in NYSE arose because specialists have survived into the age of electronic trading, and have become suspect when they fulfil customers’ orders out of their own stocks.

Another change in NYSE is a reduction in tick size. It was 1/16 of a dollar; that made New York quotes uniquely unreadable. Then, when NYSE reopened in the new millennium, the fractions were replaced by decimals. Thus in January 2000, the tick size fell from 6.25 cents to a cent. The finer pricing reduced the spreads and hence transaction costs. But orders could now be placed at more price points, order size went down, and it became more difficult to put through large block trades; the average size of trade fell from 2303 shares in 1988 to 666 in 2002. When a block purchase was put in, it would start taking shares at a certain price and, as sell orders at that price were exhausted, would move to a higher price. Someone who was watching the screen could see the strike price moving up. He could buy straightaway and sell at a higher price while the block deal was going through; or he could sell spot and buy forward, knowing that once the block deal was through, the price would fall. Speculators have worked out computer programmes to do this sort of trading. This trick is similar to front running; we may call it curve chasing. A front runner places his order before that of a block buyer or seller and profits from the resulting price movement; whereas a curve chaser spots the surge caused by a block deal and chases it.

NYSE has only one specialist for each share; Nasdaq has many. They compete, and that keeps down their profits. But for them the risks are higher than if they were the sole market makers; so they do not hold such large stocks. As a result, a good deal of trading in shares listed on Nasdaq has moved away to the new electronic trading web sites. In 2002, only 18 per cent of the trading in shares listed on Nasdaq took place on Nasdaq; the corresponding figure for NYSE was 82 per cent. In other words, an investor interested in a share listed on NYSE was likely first to go to an NYSE broker; one invested in a Nasdaq-listed share was likely to do it through the web or through one of the big investment institutions like Fidelity.

In India, liquidity was provided by the presence of jobbers in BSE. They did not have the capital to hold large inventories; instead, they were assisted by badla, which enabled them to postpone settlement indefinitely into the future. The government in a fit of pique banned badla; that sounded the death knell of BSE. Futures are not the same thing; futures transactions have to be squared up at the end of three months at most, so they do demand liquidity, and BSE traders do not have the money.

A futures market reflects views about the likely movement of a share price. If the forward price is inconsistent with the spot price and interest, an investor can profit by taking opposite positions in the forward and the spot markets. But to do so he must be able to take the prices as given; they must not be affected by his entry. That is why liquidity is important, and why trading has got ever more concentrated in a handful of big companies’ stocks.

That is also why trading has declined in minor shares, and why thousands of them have become infrequently traded. These are the shares whom market makers would impart liquidity. But market makers have died out in the Indian markets; the two phenomena – their disappearance and the illiquidity of minor shares – are interconnected. The more “efficient” the Indian stock exchanges become, the more useless they will be as a source of capital for smaller companies.

(Here ends this series of Tuesday columns, which I began in 1994 and have continued for nine years with only one interruption – 489 articles in all. The readers they brought me in touch with were varied and fascinating; they brought sparkle to my life. Their interest fired me to view the world with fresh curiosity; their expectations taught me to write. I thank them, and wish them a bright future, bonne chance!)

AN OBITUARY OF BOMBAY

[This premature obituary of the Bombay I loved and its cricket I watched was published in Business Standard of 10 and 17 June 2003.]

Chronicle of a spreading cancer

I met Ram Guha four years ago in Wissenschaftskolleg, that elite college in Berlin where forty of the world’s brightest spend ten months wining, dining, talking, reading and writing in that order. Then he had told me that he was writing a book on the Quadrangular. I thought it was going to be a book on cricket, and looked forward to it because news of the Pentangular (as the Quadrangular became in 1937) was amongst my earliest memories; I must have read about the 1946 Pentangular – the last one – at the age of ten.

Apart from the well-known greats like C K Nayudu and Vijay Merchant, I had memories of Abdul Hafeez Kardar, who played in the 1944 Pentangular and, after Partition, went on to build the first Pakistan team. I had looked forward to seeing how Ram would handle the subject. I do not quite know what he is; I wonder if he does. Although he has a degree in economics, he will vehemently deny that he is an economist. I guess he feels the closest affinity to historians, but he does not stick to history. The closest one could get would be to call him a sociologist, but that would be a bit of an insult for such an intellect. I think one day he will be a great polymath or savant; for the moment, he is best called a card-carrying author. And his book – A Corner of A Foreign Field (Picador) – comes closest to being a political tract.

I had once written about Shapurjee Sorabjee Bengallee, that fascinating 19^th-century Parsee gentleman who was sitting in the garden of a friend on the bank of Hooghlee when a thunderstorm struck and set a tree on fire. He ran, lighted a faggot from the tree, and used the fire to set up the Calcutta fire temple, since such temples must have fires that are not the handiwork of humans.

Earlier Shapurjee used to live in Bombay. In the evenings he used to go to the Esplanade with friends. There they would hire a mat and a lantern (sadri-fanas), sit down on the ground and gossip (Ram says the ground was used by dyers to spread out fabrics to dry). Shapurjee figures in Ram’s book as author of A Chronicle of Cricket. For Ram’s Bengallee is the chronicler of Parsee cricket, which began on the Esplanade – or on Kennedy Ground – the matter requires further scholarly research. For those uncivilized masses who have never lived in Bombay, Esplanade is now called Azad Maidan; initially it was used by the British troops to parade, and was called Brigade Parade. Kennedy Grounds are the triangular piece of ground between Victoria Terminus (the Shiv Sainiks would like it to be called Chhatrapati Shivaji Terminus, but everyone finds it too much of a mouthful and calls it CST), Dhobi Talao and Church Gate station (it is only a matter of time before it becomes Shrimant Dattopant Dhondopant Dhekne Agnirath Apeksha Agaar – SDDDAAA for those in a hurry).

Soon after Bombay began its life as a British outpost in 1668, it divided itself, like all British Indian towns, into a white town and a black town. The white town grew up around the fort, which was just to the north of the present Gateway of India. The black town rose north of Dhobi Talao and Crawford market. The railway to Thana was built along the east coast, and ended in Victoria Terminus. Hornby Road started from Victoria Terminus and went south towards Flora Fountain; this was the main street of Bombay, with all the great banks, insurance companies and shops.

Just to its west, the Europeans set up Bombay Gymkhana (Ram thinks the word comes from Gend Khana, where you ate balls, but I doubt it). In those days before electric fans, a broad veranda was the best antidote to heat and humidity (I wonder how they used to deal with mosquitos in the days before Odomos); a gymkhana was a pavilion with a veranda set on the edge of a large ground. The ground was used for cricket or polo; the Bombay Gymkhana was for cricket.

The hirers of sadri-fanas used to watch the British play cricket with wonder, curiosity and finally envy; the leisurely sport was just energetic enough for Bombay’s sultry climate. Finally some Parsees got hold of a bat, a ball and wickets and started playing cricket “in their strange accoutrements of Bandis and pyjamas”. In 1848 they formed the Orient Cricket Club; then, two years later, they converted it into the Young Zoroastrian Club, which still exists according to Ram. Soon there were over 30 Parsee cricket clubs with names like Jupiter, Mars, Gladstone and Ripon. Other communities followed; in the evenings, the Esplanade and the Kennedy ground were full of Indians running between wickets and shouting, “Howzzat?”

But these Indians could not set up Gymkhanas; they had to share the common grounds – amongst others with the army. And army officers used to play polo on the grounds. The horses dug up the grounds and covered them with a thick layer of dust. Cricket is not very demanding, but it does require 22 yards of fairly firm, level ground; the polo players did not let any pitch survive. The Indian subjects kept beseeching successive governors to take the polo players of the grounds, but it was decades before they finally succeeded. The story of their struggle is one of those that figure in Ram’s book.

One day in 1877, in a fit of insouciance, the Parsees challenged the British of Bombay Gymkhana to a match. The match was a draw. In a few years, Hindus wanted to join in, then Mohamedans, and finally the excluded ones formed the Rest. The resulting annual Pentangular treatment used to attract huge crowds. As national politics was besmirched with communal hues in the 1930s, the Pentangular also excited communal loyalties. A zonal cricket tournament was started to compete with the Pentangular, but could never compete with it in popularity. The Pentangular was abolished after independence.

But communal cricket was not really abolished; it was transformed into Indo-Pakistan cricket rivalry. The second half of Ram’s book is a history of this rivalry. And not just of the rivalry, but also of the decline in civility between the leaders of the two countries, of sportsmanship amongst the spectators, and of ever uglier manifestations of partisanship. Ram says that Bal Thackeray campaigns against cricket matches with Pakistan because he fears Pakistan would win. I think it is something worse than cowardliness. The disorderly behaviour of crowds, especially in Calcutta, is surely due to a conviction that it is better to win unfairly than lose fairly. It manifests itself in so many things like how parents bribe teachers to manipulate children’s marks, judges get chairmen of public service commissions to favour their children, and the determination of Indians to board a train, bus or plane first. The British thought that cricket moulded the character of a nation. Actually, the character of a nation moulds cricket, as it does so many other things.

II      The changing colour of prejudice

To continue my story of last week, the Parsees challenged Bombay Gymkhana to a match in 1877, and the British agreed; Ram Guha suggests uncharitably that a large donation to Bombay Gymkhana by Sir Cowasji Jehangir, the Parsee tycoon whom the Gymkhana would not admit, might have made it amenable. The outcome of the match was not worth reporting, so the Parsees must have lost. But near their tent, “the Parsees were packed as closely as herrings in a barrel, the front rank being composed of an interesting collection of small boys dressed in their best-coloured silk trousers, and the second and other ranks of the crowd in which the white head-dress of a Parsee priest was as conspicuous as a white man among a lot of black men.” Black and white was a very prominent distinction at that time – and for another 70 years. It is remarkable how little one thinks of skin colour India today, save perhaps for prospective mothers-in-law when they choose brides. Other obsessions have risen to the top now.

By this time, the polo players from the British army were running amuck over the esplanade, digging it up with the hooves of their horses and making it impossible for natives to play cricket. One humble petition to the Governor of Bombay followed another. Finally in 1887, the government of Bombay gave a piece of land on Kennedy Sea Face, now known as Marine Drive, to the Parsees to set up a Gymkhana. With the practice they got on the new ground, they defeated a visiting English team under G F Vernon in 1889. They were rewarded by being admitted into the army – not yet as soldiers, since they were not considered a martial race, but as volunteers.

There soon followed demands for land from Muslim Cricket Club, set up in 1883 with the financial help of the Tyabjis. It was given an identical piece of land, 425 feet square, next to the Parsee Gymkhana, in 1891. The day this news was published, the Hindu Cricket Club met in the evening and decided to ask for a piece of land. Thus did the three Gymkhanas, Parsee, Islam and Hindu, come to be set up cheek by jowl on Marine Drive. I always wondered what PJ in the name of Hindus Gymkhana stood for; now I know it stands for Parmanand Jeevandas.

But they would not play each other. For over a quarter century, the Parsees played Bombay Gymkhana almost every year. In 1905, the Hindus challenged the Parsees, who disdainfully refused. So in 1906 the Hindus challenged the Europeans, and defeated a team drawn from the entire Presidency. They repeated their feat next year. After that the Parsees could hardly turn up their noses at the Hindus. Thus started an annual Triangular tournament. In the 1912 tournament, the Mohammedans were allowed to play, thus making it Quadrangular.

In 1930, Gandhi marched with his 79 volunteers, who included my father, to Dandi and picked up a fistful of salt, and was arrested; 60,000 were jailed in the satyagraha that followed. PJ Hindu Gymkhana refused to play in the quadrangular that year, and the tournament was cancelled. Next year, the British government proposed separate seats in legislatures for the untouchables; Gandhi went to jail in protest. Amidst the red-hot emotions that politics generated, the Quadrangular was not held for four years from 1930 till 1933. Then in 1933, Cricket Club of India was set up in Delhi; in 1934 it started the Ranji Trophy tournament, for which teams were drawn from provinces and princely states, and mixed up religions and races. That spurred the Bombayites to resume the Quadrangular.

In 1933, Learie Constantine toured India at the invitation of various cricketing Maharajas. The Europeans were asked to include him in their team; but he was black, so they left him out. The fourfold classification was proving to be a straitjacket. So in 1937 a fifth team was added to cover Christians, Buddhists, Jews and others. It was called the Rest. The tournament became a Pentangular. And it was played in the brand new Brabourne Stadium, the home of Cricket Club of India at Church Gate, down the road from the three Gymkhanas on Marine Drive. Later in the 1960s, a Maharashtra minister did not get what he wanted from the CCI; so he built another stadium – Wankhede stadium – just a couple of furlongs away. Today the Cricket Club of India is just a club for food, drink and playing cards.

By that time, India was getting communalized, and secularists were opposing the Pentangular for its religious and racial overtones. They were joined by backwoodsmen who resented the primacy of Bombay. The Bombay teams generally whipped all others in the annual Ranji Trophy; so there was much jealousy of them and of the Pentangular under the surface. Its patrons and participants supported it saying that the tournament had never caused racial or religious tension. And because the Hindus had to choose the best to compete in the tournament, they put aside their caste prejudices. Thus the foremost Hindu bowler was Baloo Palwankar, a chamaar. He was probably one of two greatest Indian cricketers ever; only C K Nayudu, the sixer addict, could compare with him. His brother Vithal was a distinguished batsman. The Hindus even patted themselves on the back for having admitted Sikhs to their team.

In 1937, dyarchy was introduced and elected governments came to power in the provinces, including a Congress government in Bombay. The days of the Pentangular seemed numbered. But luckily for it, Congress governments resigned two years later when Lord Linlithgow, the Viceroy, declared war on Germany without taking their consent. The Pentangular lasted through the War. But independence sounded its death knell; it ceased to be staged in 1947.

But, as Ram points out, the communalization of cricket has continued in the Indo-Pak cricket ties. The tetchy political relationship between the two countries keeps polluting the cricket matches just as it did in united India. The Quadrangular was not held for four years in the 1930s because the relations between the British and the Indians were rocky. For the past four years, the Indian government has not allowed Indians to play Pakistan in either country. Bal Thackeray, in his earlier occupation, published a brochure of cartoons of the Pakistani touring side in 1957. His description of Hanif Mohammad was “Little Master.” Today he does not allow cricket matches with Pakistan because he fears India would lose; today Pakistanis want to begin the détente with resumption of cricket ties because cricket, unlike war and diplomacy, is one field in which they have a fair chance of winning.

Cricket is a part of public life; politics impacts on it as on everything else. It is impossible to divorce cricket from communalism, hatred of Muslims, Muslim nostalgia for their glorious history, obsession with a long-dead past. The idea that cricket can improve relations and encourage virtue is chimerical. There is much in Ram’s book besides communal and racial contention; but as I share his sadness, this is the aspect that struck me most.

HOW RED TAPE WORKS

[This column from Business Standard of 27  May 2003 is based on the experience of a real businessman. It is our own governments, not the Chinese, that defeated our businessmen in their attempt to conquer world markets]

A cautionary tale

Ashok V Desai

Suppose you want to do something constructive for your country; suppose you establish contact with a Paris boutique and get a contract to supply it with fashion garments. Land as well as labour are cheaper across the border, so you decide to set up a factory in NOIDA, also known as the city of Gautama the Buddha. Before you start, let me give you a preview. You will think I am fantasizing; but every one of the experiences I describe below happened to a real, flesh-and-blood exporter like you.

You call in a contractor to build you a factory. Make sure you deduct tax at source from whatever money you give him. The money is not for you; before the seventh of the next month you had better rush to the nearest Central Government treasury and deposit it.

Before you step into your factory, you had better register with the UP Trade Tax Department. Nowadays it is called a sales tax, but it is governed by the UP Trade Tax Act of 1948. Go and get Form XV and apply to a Trade Tax Officer for registration under Section 8.A (1) and Rule 54. Compared to what will follow, this form is simplicity itself; it asks for particulars and addresses of the owners and directors of the business. After suitable persuasion the Trade Tax Officer will grace your establishment with a visit, and give you a Certificate of Registration under Rule 55.

Now you find that you have to source all your fabric from Delhi. You had better make sure that every shipment from Delhi is accompanied by a bill, a challan, and – most important – Form XXXI in triplicate. It must contain first the name, address and registration number of the supplier, then a description of the goods including their quantity, weight, value in figures, value in words, challan Number and date; and finally, the registration number of the truck, the name and address of its owner, and – most important – the driver’s full name, parentage and driving licence number. All three copies must be signed by the supplier in Delhi, the receiver in NOIDA, and – most important – the truck driver. If your supplier forgot to send Form XXXI with the goods, they will be impounded. The Trade Tax Department of UP will release the goods on payment of 40% of the value. It would save money if you make an informal understanding with the concerned officer.

Suppose your Form XXXI is in order and the goods arrive at the factory. Do not, for goodness’ sake, throw it away. Within 48 hours of its crossing the border, it must be delivered intact to the Trade Tax Department. The clerk may hesitate to certify that it was so delivered – you may have to make a bargain with him.

If you survive a year of form-filling and visits to government offices, you will get a notice from the Trade Tax Department, asking you to give details of purchases (including bill numbers, dates, amounts, names of suppliers, quantities, weights, value of goods etc) from registered dealers within UP, from unregistered dealers within UP, of purchases from outside the state (bill numbers, dates – well, you have got the idea) – to be accompanied by Form C, of goods worth less than Rs 5000 from outside UP, and work contracted out (name and address of contractor, amount of contract, tax deducted, date on which it was deposited, etc), details of opening stocks, purchases and closing stocks of raw materials, work-in-progress and finished goods (distinguished by material, design, quantity, rate and amount), and of sales, distinguishing between sales in UP, sales in India outside UP and sales outside India. When you do this, the assessing officer will tell you that you siphoned off some of the raw material and sold it in the market to avoid sales tax. You may give him a demonstration of input-output coefficients and show that the finished goods produced must have exhausted the raw materials used. Then he will accuse you of not showing the entire production in the books and selling off a part without paying sales tax. You may want to start all over with the demonstration. But he may not have the patience; an informal arrangement may be preferred. You do not have to pay the tax on exports, for which you must produce more details, such as challan, transport receipt, airway bill etc; but if the pretty Paris boutique owner does not send the money within six months, the Trade Tax Officer will ask you to pay tax on the exports.

When you have satisfied all the babus and are just about to rest, you will get a phone call from government auditors in Lucknow. They will call you over to Lucknow and accuse you of the same things as the Trade Tax Officer. Having satisfied him will not satisfy them; informal understanding must be reached with them separately.

Suppose now that the beautiful boutique is not satisfied with the sequins you sewed on, and sends you ones to put on the next consignment. You will have to pay duty on those expensive sequins; but you can get a refund. For this drawback you must apply in another form, which must be attested by the Customs at the port of shipment. Chances are that the customs officer will write on the form:

“Inspected lot and examined 5%. Checked description, qty. Checked AEPC validity. Fabric does not seem to be made of fibre claimed. TM of sequins does not seem to be French. Value, stated at 80 Fr Francs, appears on high side; Rs 80 may be closer. If approved, RS sample may be sent to Verification Sec. Signed L.K. Hungry, Dty AO. Countersigned I.M. Greedy, AO.”

Well, you have had it; that shipment will not reach the buyer in time, who will not pay you, and you will have to close down. You should have had the foresight to reach an informal understanding with the customs before they got their claws into your lovely dresses.

If you survive that, your journey has just begun. For soon you will receive a notice from the central Excise Department asking you to register yourself, for the finance minister lowered the threshold for small textile firms in the last budget. You may ask for exemption saying you are an exporter. But that shipment that customs held up: where will you sell it but to a kabadiwallah? And that will make you subject to excise duty – or CENVAT as they call it these days. Get ready to fill Form A-1, and make sure your registration is in Form RC-1; it will take some gentle persuasion to get it. You will have to file excise returns by the fifth of every month – opening stocks, closing stocks, purchases, sales etc in agonizing detail. And when you export, you had better call the Range Excise Officer to seal the packages. He will need to be persuaded, as also the customs officer, from whom he will want a certificate that the goods have left the country. Lucky goods. Unlucky you.