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1 What is liquidity in a market not in a company or with an asset but in a market Why do exchanges tend to be naturally occurring monopolies Tell the story of how such a monopoly was broken in India by the National Stock Exchange In a market liquidity refers to the forces of demand and supply and on how easy it is for individuals to enter the market and make transactions without making an impact on prices Exchanges tend to be natural monopolies because there are not many exchanges in every region and a given exchange in a given region dominates the market This gives exchanges the possibility of abusing of their power In 1994 there was a monopoly of the BSE Bombay Stock Exchange which at the time had 75 of all equity trade in India It had several minor competitors until the NSE or National Stock Exchange was created in 1994 The NSE was able to dominate the market and surpass the BSE in a year The BSE since the beginning of the 90s had been illegally leveraging the equity market as well as bribing banks taking advantage of their power and a poor telecommunication infrastructure in India Since India was opening its market to foreign investment the BSE was not very attractive for investors Competition by the NSE stimulated the market and forced the BSE to have clean activities in order to attract investment The NSE opposed to the BSE was a public exchange and it entered the market with strong telecommunication infrastructure satellite technology in order to deal with previous equity trading inefficiencies payment shares sold could take up to three months instead of two days and high transaction costs NSE offered fast and low cost transactions with a transparent governance Thanks to this the BSE had to reinvent itself and the market monopoly was broken 2 What is an exchange-traded fund Explain how they work
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