Q&A
Q.) Even when there are more companies listed on BSE and it is older compared to NSE, how can we explain the very high volume traded on NSE compared to BSE?
A.) NSE has the first mover advantage.
NSE was setup in 1993, decades after BSE was founded. But it was set up as a professional corporate entity. There was a separation between management and owners. It was promoted by leading financial institutions and supervised by SEBI. NSE was founded to bring transparency in Indian securities market, which it did splendidly.
Before NSE, Indian stock market was dominated by BSE which was not a professional institution but an organization managed by brokers. The membership was limited to an exclusive group of brokers. These brokers did their business from Mumbai. If I was in Kolkata, I could only invest through these brokers.
Further, the trading was floor based. Brokers stood on floor and shouted their orders. A trade was conducted when demand and supply met. Also, the trading was paper based instead of electronic. Another big problem was lot based trading. Trading could only be done in lots of specified number of shares, say of 10,20, 50, etc. Now if I had an odd lot, say of 9 or 19 shares, It was not possible for me to trade.
Then there was the issue of transparency (Harshad Mehta scam). It was not possible to get the trading data or financial information of the companies.
Then came NSE and smacked BSE on head.
It was set-up as a corporation managed by professional managers instead of brokers. Anyone who fulfilled the criteria laid down by NSE could become a member. NSE introduced electronic trading in India. Now you didn't need to go to stock exchange. Stock exchange came to you on a computer screen. Anyone, from anywhere in india or abroad, could invest in securities.
Indian investors were hungry for this opportunity.
NSE reformed and revolutionized the markets. The transparency improved. Now all the trading data and company information was available instantly online. It introduced derivative trading before BSE. It was the first indian stock exchange to introduce trading in global indices. It solved the odd lot problem by reducing the lot size to 1. Now I can trade even if I have single share.
Though BSE was older, and a bigger brand, it was lethargic and resisted change. And it paid the price.
Also, NSE has technology to tackle the rapid transactions. Further, for a companies to get listed on NSE has to meet higher norms compared to BSE. This is a reason you would find more than 5000 companies listed on BSE compared to around 1500 companies in NSE.
Having listed more companies does not necessarily mean trading in all those companies takes place. Actual trading in stock market is limited to around 300-400 companies where you can find the liquidity. Majority of the companies listed in BSE are in Z category i.e. trading on these companies not happening.
As NSE got advantage of first mover to technology aspect, products like derivatives on indices, Volatility Index, etc you would find majority of the trades happening in the NSE.
Source ~ Quora