The Problem: Wide Spreads on a Low-Volume Exchange
You place an order for a mid-cap stock on MSEI. The last traded price is ₹500, but the lowest sell offer is ₹510. That ₹10 gap — the bid-ask spread — means you lose money the moment the trade executes. On NSE or BSE, the same stock might trade with a spread of a few paise. This spread difference is the core challenge for MSEI’s 2026 relaunch.
Answer
MSEI addresses this with a Liquidity Enhancement Scheme (LES). Under LES, the exchange pays authorised firms — called market makers — to place continuous buy and sell orders in the order book. This narrows spreads, provides a guaranteed counterparty, and reduces slippage. SEBI permits LES only on exchanges or segments with insufficient natural volume, and only as a temporary measure until organic retail participation grows.
Regulatory Background
SEBI governs all LES programmes through its Revised Guidelines (September 2021). The rules impose three constraints:
| Rule | Requirement |
|---|---|
| Incentive cap | Exchanges may waive fees or pay cash; MSEI pays ~₹40 lakh/month per market maker |
| Spread obligation | Market makers must maintain a maximum top-of-book spread (MSEI caps this at ~5 basis points) |
| Disclosure | All LES programmes must be publicly disclosed with start and end dates |
Market makers must keep two-sided quotes (both buy and sell) for most of the trading session. SEBI monitors compliance and can revoke approval if obligations are unmet.
For MSEI’s broader regulatory position and financial outlook, the LES cost is a significant line item — it is, in effect, the exchange paying to manufacture the liquidity it cannot yet attract organically.
How LES Changes Your Trading Experience
Three things improve when market makers are active:
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Tighter spreads. Competition among market makers pushes the bid and offer closer together. Under MSEI’s LES, the spread on covered stocks can fall to around 5 basis points — comparable to less-liquid NSE names. You pay a price closer to fair value.
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Counterparty availability. Without LES, you might place a buy order and find no sellers. With market makers obligated to quote on both sides, there is always someone to take the other side of your trade. This matters most for the 130 stocks active on MSEI at relaunch.
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Lower slippage. Slippage is the gap between the price you expect and the price you get. With deeper order books, large orders move the price less. Your execution cost drops.
For a comparison of how MSEI stacks up against NSE and BSE on volume and product range, and the technology upgrades supporting the relaunch, see the linked articles.
Practical Implications
LES is not a permanent fix. It is a subsidy designed to bootstrap volume. Here is what that means for you:
Use limit orders. On any exchange with lower volumes, a market order risks filling at an unfavourable price. Set a limit to control the maximum you pay or the minimum you accept.
Check market depth before trading. Open the order book in your broker app and look at the top 5 bids and asks. Verify that the quantities on offer are sufficient for your order size. A market maker quoting 100 shares at the best price will not help you fill a 5,000-share order without slippage.
Understand the time-bound nature. SEBI allows LES for fixed periods — typically 6 to 12 months. When the scheme expires, spreads may widen again unless natural volume has grown to replace the market maker’s activity. Monitor MSEI’s official announcements for scheme renewal or expiry dates.
Compare prices across exchanges. If a stock is listed on both MSEI and NSE, check both order books before trading. The LES-supported MSEI price might occasionally be tighter than NSE for less-liquid names. For context on what drives exchange competition, see how stock exchanges generate revenue.
Risks to Watch
- Scheme expiry. If SEBI does not renew the LES, spreads revert to pre-scheme levels. Any trading strategy that depends on tight MSEI spreads must account for this.
- Market maker withdrawal. Market makers can exit if the economics stop working. The ₹40 lakh/month incentive must cover their hedging and capital costs. If it does not, they reduce quote sizes or pull out.
- Artificial depth. LES liquidity is manufactured, not organic. It can disappear faster than natural volume during volatility. For a fuller risk assessment, see the MSEI trading risk guide.
What to Do
- Check the LES stock list. Verify which stocks are covered at msei.in/about-us/liquidity-enhancement-scheme. Trade only LES-covered names if you need reliable execution.
- Compare execution quality. For any order above 500 shares, check the MSEI and NSE order books side by side before routing.
- Track scheme dates. Note the LES start and end dates. Set a reminder to re-evaluate your MSEI trading strategy before expiry.
Sources
Verify current status at nseindia.com, bseindia.com, or msei.in before trading.