In today’s Finshots, we explain why a commodity exchange monopoly has been having a rough time of late.

But before we get there, I have a question for you. Are you a beginner investor? Or maybe looking to get your hands into investing. If that is the case, we have the perfect story for you. Watch how one investment can almost wipe you out entirely and what you can do to prevent this situation. We promise you'll love it. Link here.

The Story

If you want to bet on the price of oil, what do you do?

And let's suppose you don't want to deal with the logistics of storing and transporting oil in massive barrels. You just want to profit off of the price movement. Nothing else. If this is you, there’s really only one place to go if you want to execute this bet — the Multi Commodity Exchange (MCX)*. It’s just like BSE or NSE. They help you buy and sell stocks. On MCX, you can deal in oil, metals like gold, and even agricultural stuff like cotton. And here they have a virtual monopoly commanding over 90% market share.

Now who doesn’t love a monopoly, right? Especially one where everything seems to be trending in the right direction. As per HDFC Securities, the number of active unique clients has soared from 3.5 million in 2020 to over 10.5 million today. And the average daily trading volume of these commodity options contracts has soared from just ₹2,300 crores to ₹52,600 crores during this period too. The more the clients trade, the more money MCX will make.

So the stock price must be soaring, right?

Well, not quite. And that’s partly because of a software roadblock. See, if you’re an exchange facilitating all these bets, the one thing that you do need is solid software. It’s mission critical. Because even if there’s a minor glitch during trading, it can result in massive losses to the folks who’re trading.

Now the issue here is that MCX doesn’t have its own software. It relies on a third-party company called 63 Moons Technologies to run the show. It pays 63 Moons a fixed fee and even a percentage share of revenues for the tech. And the unfortunate reality is that nearly 30–40% of MCX’s expenses are classified as software costs. That’s a lot of money that’s just being given away.

Now you might think that’s a bit weird. Why on earth would MCX hand over one of the most critical parts of its operations to someone else?

Well, there’s a reason behind this. And we bet it’ll shock you!

There’s something you should know about 63 Moons. It has a past life and it’s trying to escape it. A time when it used to go by the name Financial Technologies India Ltd (FTIL). And back then, FTIL wasn’t just a software company. It was actually a software company that ran a few commodity exchanges — there was one called NSEL and another…well, MCX.

Yup, the folks behind 63 Moons were the founders of MCX.

But everything unravelled for FTIL somewhere around 2013. People uncovered a mammoth scam at NSEL. The exchange was playing fast and loose with the rules. There was rampant misselling. And customers were being defrauded. When all this came to light, FTIL was forced to relinquish control of MCX.

Rakesh Jhunjhunwala and Kotak Mahindra Bank stepped in to pick up the pieces. And to rid itself of its sins, FTIL soon changed its name to 63 Moons.

Anyway, because FTIL founded MCX way back in 2003, it simply used its own software to get the commodity exchange up and running. And there’s nothing wrong with that. But you can imagine that after FTIL’s implosion, investors weren’t pleased that it continued to hold the keys to the software contract. Everyone wanted MCX to look for options. And in 2021, MCX finally picked Tata Consultancy Services to do the job. It expected things to go smoothly and be ready for launch in its new avatar within a year. Because TCS has all this vast experience, no?

But it didn’t quite work out as imagined. The software still isn’t ready. The mock trading sessions have been cancelled a couple of times. And the timeline for implementation keeps getting postponed. Again. And again. And again.

What this means is that 63 Moons knows that MCX has no option. It knows that MCX can’t do anything with its software at the moment. And that means they can squeeze MCX for all its worth. And we mean that literally.

See, before TCS entered the picture, 63 Moons played nice. They charged around ₹16 crores per quarter from MCX for tech support. But when the first request for an extension came about in September 2022, they upped it to ₹67 crores. The second time around, it went higher to ₹87 crores. And now, it’s going to be ₹125 crores per quarter. For context, brokerages expect that MCX will earn revenues of around ₹550 crores this year (FY24). And that means, just extending the darn software contract by a couple of quarters could eat away half of what the commodity exchange will earn.

So yeah, 63 Moons has most certainly grabbed this opportunity with both hands.

But here’s the funniest part of the story. 63 Moons sent a letter to the stock exchange about this development. And it didn’t pull any punches.

Sample this: “We have once again agreed to the eleventh-hour request by MCX, which according to MCX is for the ‘last time’ for one more time.”

Or this line — “We sincerely wish that this ‘last time’ really happens someday, so that we deploy our excellent team of exchange technology engineering group in mega promising opportunity in new digital world.”

And finally this — “As the founders and well-wishers of MCX, we wish them good luck with these new experiments and hope that they will reach the right destination one day.”

Sarcastic, much?

Now when you read this, we won’t blame you for thinking that the tech company was doing MCX a favour. But here’s the thing. It looks like 63 Moons is actually quite dependent on MCX too. The commodity exchange is probably their biggest customer — if you do the math, you’ll realize that out of the ₹112 crores they earned in the final quarter of FY23 (Jan-March ‘23), nearly 80% of it was thanks to the MCX deal.

So why this sarcasm, 63 Moons? Haven’t the old wounds healed yet?

Either way, MCX will move on. It’ll get the new software from TCS up and running. Hopefully sooner rather than later. And investors can put this behind them and enjoy the money this commodity monopoly truly can deliver. But till it actually happens, it’s quite hard to see why the stock price should see any sort of rally.

Until then…

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*You can take physical deliveries of some commodities if that’s what you want too.