Many first-time investors are surprised when they open two trading applications and notice that the same company is quoted at marginally different levels. They wonder whether something is broken. In fact, such differences are normal and reveal how markets function. Anyone comparing the BSE Share Price with the NSE Share Price of an identical company on the same minute may find a gap of a few paise, occasionally more. This article explains why these differences appear, how quickly they disappear, and what practical lessons investors can draw from them.
Two Separate Order Books
India has 2 stock exchanges, each having their own order book. When you buy on one platform you see only the sellers on that platform. Since the participants on either exchange are different, the best buy and sell quotes available at a given point in time can be different. A big order executed on one book could push its prices up (or down) before the other catches up. It is these discrepancies that cause the gaps.
The Role of Arbitrage
Arbitrageurs and algorithmic trading desks are always on the lookout for such an opportunity. By buying on the cheaper exchange and selling on the expensive one, they make a riskless profit. In the process, they also ensure that the prices on the 2 exchanges converge quickly. Arbitrageurs are essentially the market makers who provide liquidity and ensure that the prices on both platforms remain close to each other at all times.
Liquidity Is the Deciding Factor
For most large-cap stocks, there is one exchange where most of the trading volume happens. The market depth (number of buy and sell orders) on that exchange will be better (i.e. larger), reflected in its bid-ask prices. For thinly-traded issues, the situation is completely reversed. The other exchange would have virtually no volume in that scrip and hence its last traded price (LTP) would be significantly different from the primary exchange. Always check the last traded time and volume before assuming that some scrip is cheap on one platform.
What Retail Investors Should Do
To cut a long story short, it is best for retail investors to go with the exchange that has better liquidity, as it ensures a better price. Use limit orders to protect against slippage. It is not advisable to try and capture the arbitrage opportunities yourself since transaction costs (brokerage, taxes, etc.) will far outweigh any trading profits plus the fact that arbitrageurs have much sharper algorithms which will always beat any individual investor.
It is also important to note that settlements happen through the same depository system regardless of the exchange so you can rest assured that the shares will reflect in your demat account accordingly. Your broker may automatically route buy orders to whichever exchange has a better price. Either way, it is always better to check with your broker about their exchange routing policies.
The bigger lesson for individual investors is to remember that any given quote is only a snapshot of what’s happening at that particular moment in time. Prices are formed through a continuous auction process where thousands of trades are executed every second. At any given moment, some investors are buying at a slightly higher price whilst some are selling at a slightly lower one. Recognising this, it is best not to get too fussy about prices. Focus on fundamentals, valuations, position sizing and most importantly, patience. After all, wealth creation in equities takes time regardless of the approach.
