As the merger of stock exchanges is not always possible due to a variety of reasons, the benefits attendant on a bigger market can be achieved by interlinking the different markets and allowing free flow of orders from one market to another and their execution at the best price, that is, the lowest price for purchase and the highest for sale. The credit for initiation of translation of this concept into practice goes to the US.

National Market System in the US:

In the US, the objective of an investor getting the best execution price was achieved by the creation of a National Market System (NMS), the mandate for which came from the US Congress by way of the Securities Acts Amendments of 1975 to the Securities Exchange Act of1934. While the Securities Acts Amendments directed the Securities & Exchange Commission (SEC) to use its authority to facilitate the establishment of a National Market System, SEC left the actual design of the NMS to the securities industry. The securities industry developed a system known as the Intermarket Trading System (ITS) to facilitate inter-market trading in exchange-listed equities based on the current quotation information emanating from the linked markets. ITS enables a broker or dealer who is physically present in one market to execute orders, as principal or agent, in an ITS security at another market. Customers are thus enabled to secure the best price prevalent in any of the linked markets. A broker-dealer is, however, not bound exclusively by price considerations. What is required is that the broker-dealer endeavour, using due diligence, to obtain the best execution possible, given all the facts and circumstances including the size of the order, cost and difficulty associated with achievingan execution, etc.

There are today eight national securities exchanges, viz, the New York Stock Exchange, American Stock Exchange, Cincinnati Stock Exchange, Philadelphia Stock Exchange, Boston Stock Exchange, Midwest Stock Exchange, Pacific Stock Exchange and Chicago Board Options Exchange and the National Association of Securities Dealers' Nasdaq stock market running the ITS with a central computer facility with inter-connected terminals in the participating market centres.

IBIS System in Germany

Germany has eight stock exchanges, the Frankfurt Stock Exchange and seven others. Trading in the 30 selected German blue chips constituting the DAX, which is the German stock index, and seven non-DAX issues, warrants and liquid public bonds has been conducted for the last few years through a computerised system, known as IBIS, open to all the members of the eight exchanges. Trading in all other issues is being conducted on the floor at each of these exchanges. The services of IBIS are provided by theDeutsche Borse AG, which operates the Frankfurt Stock Exchange and the Deutsche Terminborse (that is, the German futures exchange). IBIS primarily caters to the needs of institutional investors and the transactions concluded on the system are automatically transmitted for clearing and settlement.

Transborder Linkages

The dawn of 1998 has been witnessing linkages among stock exchanges transcending nations. Recently, the London and Frankfurt stock exchanges have announced plans to provide for, by January 4, 1999, a common platform to trade in the shares of the top 300 European companies, which in the words of the exchanges' chief executives will result in a "low-cost", efficient and accessible equity-market infrastructure to enable issuers, investors and market participants to take full advantage of the opportunities arising from the development of a pan-European capital market. A joint venture with equal equity shares to both these exchanges will be set up to achieve theobjective.

Inter-connectivity of Indian stock exchanges:

In line with the global trend, domestic stock exchanges are providing for an inter-connected stock-market system for developing a broader and deeper market. The foundation for inter-connectivity of stock exchanges was laid in August 1987 when the stock exchanges of the country, at the initiative of the Bombay Stock Exchange, were linked up for instant display of share prices and other related information through the PTI Stockscan Service, which continues to be popularly used even today.

In 1991, a study on the feasibility of establishing a National Stock Market System (NSMS) was made by an international consulting agency at the instance of the Bombay Stock Exchange (BSE). The study had very strongly recommended the establishment of NSMS as a solution to address the shortcomings like lack of adequate liquidity, development of the debt market, etc. The proposal, however, failed to get itself translated into action due to inadequate interestamong the participants.

The establishment of the National Stock Exchange operating currently from more than 200 centres, and the expansion of the BSE through its BOLT system in operation at present from more than 150 centres, resulted in relative negligence of regional stock exchanges despite the fact that trading at most of these exchanges were automated. In 1997-98, the 17 regional stock exchanges accounted for a meagre turnover of Rs 84,631 crore, amounting to a meagre 9.3 per cent of the turnover of Rs 9,08,691 crore in the country.

So the regional stock exchanges were forced to consider the question of inter-connecting themselves to develop a national market as part of a strategy to ensure that their services are utilised fruitfully in the larger interests of investors. The 15 regional bourses of the country have forged an alliance and evolved a Rs 15-crore project to develop an inter-connected stock-market system, enabling a member of any participating exchange to trade with members of all otherparticipating exchanges through a common infrastructure. The inter-connected stock exchange (ISE) is itself a stock exchange providing a platform for trading. The project, which was conceived in July 1996, will soon become operational.

Advantages:

The advantages of ISE are manifold. First, investors will be benefited by a reduction in transaction cost, as they will have access to a larger national market through their local brokers without any additional cost and there will be greater liquidity of regional stocks arising out of a national reach. Secondly, issuers will have the facility of raising resources from a large integrated national market by listing the securities in any participating regional exchange. Thirdly, stock brokers will have larger business to handle at lesser cost. Fourthly, the regulator will find it easier to regulate, as the risk-management system of ISE is better, particularly because of professional management. Finally, there will be a revival of activity at the regionalstock exchanges, some of which find themselves today driven to the wall.

Conclusion

As a result of the operations of ISE, a strong third force will emerge, acting in a complementary manner to the NSE and BSE, adding to market synergy. What is really needed today is to revive the cult of equity in the country, which has received a severe setback and ISE, with a vast network of over 4,000 stock brokers and over 40,000 sub-brokers located in the various parts of the country, will help the process.