The future of Indian stockmarkets and stock exchanges actually began in November 1994. That was the year National Stock Exchange (NSE) introduced screen-based trading across the country. Not only did this make trading far more transparent, it ensured that trades in India were done much the same way they were in other parts of the world.

The country's premier exchange then, Bombay Stock Exchange (BSE), had to perforce respond to this with a screen-based trading system of its own. It managed to do so within the following six months.

That the quality of this response wasn't very good is evident in the fact that trading volumes on BSE fell behind those on NSE within a year, and have lagged behind ever since. But that's another story, for another forum.

The fate of India's regional exchanges has been worse: they have increasingly become irrelevant in a scenario where it is possible for an investor even in a small town to trade on NSE.

Statistically speaking, by 2000-01, NSE accounted for nearly one-half of trading volume of all the exchanges in the country put together.

If 1994 marked the first chapter in the future of Indian stockmarkets, then July 2001 did the second. The month saw the introduction of a rolling settlement system for major stocks, as well as the institution of a uniform weekly settlement cycle for all the other stocks.

Apart from rendering regional exchanges even more irrelevant-one of their touted benefits was the arbitrage opportunities they presented-this move was a prophylactic against payments crises in the future.

Remember, it was the unwillingness of Securities and Investment Board of India (SEBI) to introduce rolling settlement in time that considerably added to the seriousness of the stockmarket crisis of March 2001.

Today, only four of the exchanges-NSE, BSE, CSE and DSE-matter for investors; there's insignificant trading, or no trading at all, in other exchanges. The cash market trading volume of NSE now averages 63 per cent of the aggregate trading volume of these four exchanges. BSE averaged 35 per cent.

There are enough signs that CSE and DSE will be forced to down their shutters in the not-too-distant future as their operating levels-less than 2 per cent of cash trades-result in huge revenue deficits. Worse, neither exchange has the money to upgrade its it infrastructure, a key requirement for any exchange that wants to prepare for the future.

What is the future of Indian stock exchanges? First, only two exchanges may be expected to survive. The lead National Stock Exchange has gained over BSE will only increase in the coming years. Already, NSE is perceived to be more investor-friendly than BSE by most of the investors.

Second, derivatives trading will have a significant positive impact on the volume of cash-trading. The foundations for this were laid by NSE as far back as 1996. However, it was only in June 2000 that SEBI cleared trading in derivatives.

The clutch of instruments that have been introduced since-index futures, index options, options in select individual stocks, and futures in select stocks-and the rapidity with which they have been accepted, bode well for the markets.

They also indicate that the Indian stockmarket is ready for the next big leap-derivatives are important constituents of trading volumes on major exchanges across the world.

The fact that NSE is a preferred derivatives destination-on December 6, while the National Stock Exchange logged derivatives trading of Rs 956 crore, Bombay Stock Exchange did only Rs 8 crore, less than one per cent of the former-is just another reason why I think it could soon become the only exchange that matters in India.

In the future, the trading volumes of a stock exchange in its cash and derivatives markets will increasingly feed off each other in a synergistic relationship.

Investors seeking to building up positions in the cash market will be able to hedge them using derivatives and those building up positions in derivatives will be able to do the reverse.