REPORT ON :

TRADING MECHANISM IN STOCK EXCHANGE

SUBMITTED BY: SUBMITTED TO :

SURAJ GANDOTRA PROF AMISHA GUPTA

ROLL NO 35

STOCK EXCHANGE

A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds.

To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there is a central location at least for record keeping, but trade is increasingly less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of increased speed and reduced cost of transactions. Trade on an exchange is by members only.

The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in thesecondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors that, as in all free markets, affect the price of stocks (see stock valuation).

There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities.

STOCK EXCHANGES GLOBALLY:

American Stock Exchange

Australian Securities Exchange

Athens Stock Exchange

Belgrade Stock Exchange

Berliner Börse

Bermuda Stock Exchange

Bolsa Mexicana de Valores

Bolsa de Valores de Colombia

Bolsa de Valores de Lima

Bombay Stock Exchange

Bucharest Stock Exchange

Budapest Stock Exchange

Bulgarian Stock Exchange - Sofia

Canadian National Stock Exchange - CNSX

Cairo & Alexandria Stock Exchange

Casablanca Stock Exchange

Channel Islands Stock Exchange

Chicago Stock Exchange

Euronext Amsterdam

Euronext Brussels

Euronext Lisbon

Euronext Paris

Frankfurt Stock Exchange

Ghana Stock Exchange

Helsinki Stock Exchange

Hong Kong Stock Exchange

Indonesia Stock Exchange

Irish Stock Exchange

Istanbul Stock Exchange

Karachi Stock Exchange

Korea Stock Exchange

Kuwait Stock Exchange

London Stock Exchange

Luxembourg Stock Exchange

Madrid Stock Exchange

Malaysia Stock Exchange

Milan Stock Exchange

Montreal Stock Exchange

Moscow Interbank Currency Exchange

Nagoya Stock Exchange

National Stock Exchange of India

New York Stock Exchange

New Zealand Exchange

Nigerian Stock Exchange

Osaka Securities Exchange

Philippine Stock Exchange

Prague Stock Exchange

Russian Trading System

Santiago Stock Exchange

São Paulo Stock Exchange   ( BOVESPA )

Shanghai Stock Exchange

Shenzhen Stock Exchange

Singapore Exchange

Stockholm Stock Exchange

Stock Exchange of Thailand

Taiwan Stock Exchange

Tehran Stock Exchange

Tel Aviv Stock Exchange

Tokyo Stock Exchange

Toronto Stock Exchange

Trinidad and Tobago Stock Exchange

Warsaw Stock Exchange

ROLE OF STOCK EXCHANGES

Stock exchanges have multiple roles in the economy. This may include the following:

Raising capital for businesses

The Stock Exchange provide companies with the facility to raise capital for expansion through

selling shares to the investing public.

Mobilizing savings for investment

When people draw their savings and invest in shares (through a IPO or the issuance of new company

shares of an already listed company), it usually leads to rational allocation of resources because funds,

which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to

help companies' management boards finance their organizations. This may promote business activity with

benefits for several economic sectors such as agriculture, commerce and industry, resulting in

stronger economic growth and higherproductivity levels of firms. Sometimes it is very difficult for the stock

investor to determine whether or not the allocation of those funds is in good faith and will be able to

generate long-term company growth, without examination of a company's internal auditing.

Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels,

hedge against volatility, increase itsmarket share, or acquire other necessary business assets.

A takeover bid or a merger agreement through the stock market is one of the simplest and most common

ways for a company to grow by acquisition or fusion.

Profit sharing

Both casual and professional stock investors, as large as institutional investors or as small as an

ordinary middle class family, throughdividends and stock price increases that may result in capital gains,

share in the wealth of profitable businesses. Unprofitable and troubled businesses may result in capital

losses for shareholders.

Corporate governance

By having a wide and varied scope of owners, companies generally tend to

improve management standards and efficiency to satisfy the demands of these shareholders, and the

more stringent rules for public corporations imposed by public stock exchanges and the government.

Consequently, it is alleged that public companies (companies that are owned by shareholders who are

members of the general public and trade shares on public exchanges) tend to have better management

records than privately held companies (those companies where shares are not publicly traded, often

owned by the company founders and/or their families and heirs, or otherwise by a small group of

investors).

Despite this claim, some well-documented cases are known where it is alleged that there has been

considerable slippage in corporate governance on the part of some public companies. The dot-com

bubble in the late 1990s, and the subprime mortgage crisis in 2007-08, are classical examples of

corporate mismanagement. Companies like Pets.com (2000), Enron

Corporation (2001), One.Tel (2001), Sunbeam(2001), Webvan (2001), Adelphia (2002), MCI

WorldCom (2002), Parmalat (2003), American International Group (2008), Bear Stearns (2008),Lehman

Brothers (2008), General Motors (2009) and Satyam Computer Services (2009) were among the most

widely scrutinized by the media.

However, when poor financial, ethical or managerial records are known by the stock investors, the stock

and the company tend to lose value. In the stock exchanges, shareholders of underperforming firms are

often penalized by significant share price decline, and they tend as well to dismiss incompetent

management teams.

Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is open to both the

large and small stock investorsbecause a person buys the number of shares they can afford. Therefore

the Stock Exchange provides the opportunity for small investors to own shares of the same companies as

large investors.

Government capital-raising for development projects

Governments at various levels may decide to borrow money to finance infrastructure projects such as

sewage and water treatment works or housing estates by selling another category of securities known

as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy

them, thus loaning money to the government. The issuance of such bonds can obviate the need, in the

short term, to directly tax citizens to finance development—though by securing such bonds with the full

faith and credit of the government instead of with collateral, the government must eventually tax citizens

or otherwise raise additional funds to make any regular coupon payments and refund the principal when

the bonds mature.

Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend

to rise or remain stable when companies and the economy in general show signs of stability and growth.

An economic recession, depression, or financial crisis could eventually lead to a stock market crash.

Therefore the movement of share prices and in general of the stock indexes can be an indicator of the

general trend in the economy.

INDIAN STOCK EXCHANGE

BOMBAY STOCK EXCHANGE(BSE)The Bombay Stock Exchange (BSE) (Marathi: मुं��बई शे�अर बजार Bombay

Śhare Bāzaār) (formerly, The Stock Exchange, Bombay) is a stock exchange located on Dalal Street,Mumbai and is the oldest stock exchange in Asia. The equity market capitalization of the companies listed on the BSE was US$1.63 trillion as of December 2010, making it the 4th largest stock exchange in Asia and the 8th largest in the world. The BSE has the largest number of listed companies in the world.

NATIONAL STOCK EXCHANGE (NSE)The National Stock Exchange (NSE) (Hindi: रष्ट्री य शे�अर बज़ार Rashtriya

Śhare Bāzaār) is astock exchange located at Mumbai, Maharashtra, India. It is the 9th largest stock exchangein the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading. NSE has a market capitalization of aroundUS$1.59 trillion and over 1,552 listings as of December 2010. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India, and between them are responsible for the vast majority of share transactions. The NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalisation.

MECHANISM OF TRADING IN STOCK EXCHANGE

FLOOR TRADING

E- TRADING (ONLINE TRADING)

FLOOR TRADING:

Floor trading is where traders or stock brokers meet at a specific venue referred to as a trading floor or pit to buy and sell financial instruments using open outcry method to communicate which each other. These venues are typically stock exchanges or futures exchanges and transactions are executed by members of such an exchange using specific language or hand signals. During the 1980s and 1990s phone and electronic trading replaced physical floor trading in most exchanges around the world.

As of 2007 few exchanges still have floor trading. One example is the New York Stock Exchange (NYSE) which still execute a small percentage of their trades on the floor. That means that the traders actually form a group around the post on the floor of the market for the specialist, someone that works for one of the NYSE member firms and handles the stock. Just like in an auction, there are shouts coming from those that want to sell and those that want to buy. The specialist facilitates in the match and centralizing the trades.

Change is inevitable, and the NYSE underwent the biggest change on January 24, 2007: it went from strictly an auction market to a hybrid that encompassed both the auction method and an electronic trading method that immediately makes the trade electronically. A small group of extremely high-priced stocks isn't on this trading system and is still auctioned on the trading floor.

Even though over 82 percent of the trades take place electronically, the action on the floor of the stock exchange still has its place. While electronic trading is faster and provides for anonymity, there's more opportunity to improve the price of a share if it goes to the floor. Investors maintain the right to select the method they want to use.

DISADVANTAGES OF FLOOR TRADING

Trading Restrictions: No one shall execute or attempt to execute any Transaction on the Floor of this Exchange except a Floor Broker of the Exchange who:

(i) has been granted floor trading privileges pursuant to the Rules;

(ii) has been assigned a trading identification number by the Exchange;

(iii) has been assigned by the Exchange and wears in a prominent

position a Floor Broker identification badge issued to such Member in accordance with this Exchange's procedures;

(iv) has adequate clerical assistance as determined by the Board.

ELECTORNIC TRADING:

Electronic trading, sometimes called e-trading, is a method of trading securities (such as stocks, and bonds), foreign exchange or financial derivatives electronically. Information technology is used to bring together buyers and sellers through electronic trading platform and networks to create a virtual market places

Etrading systems are typically proprietary software (etrading platforms or electronic trading platforms), running on COTS hardware and operating systems, often using common underlying protocols, such as TCP/IP.

Exchanges typically develop their own systems (sometimes referred to as matching engines), although sometimes an exchange will use another exchange's technology (e.g. e-cbot, the Chicago Board of Trade's electronic trading platform, uses LIFFE's Connect system), and some newer electronic exchanges use 3rd-party specialist software providers (e.g. the Budapest stock exchange and the Moscow Interbank Currency Exchange) use automated trading software originally written and implemented by FMSC, an Australian technology company that was acquired by Computershare, and whose intellectual property rights are now owned by OMX.

Exchanges and ECNs generally offer two methods of accessing their systems -

an exchange-provided GUI, which the trader runs on his or her desktop and connects directly to the exchange/ECN, and

an API which allows dealers to plug their own in-house systems directly into the exchange/ECN's.

From an infrastructure point of view, most exchanges will provide "gateways" which sit on a companies' network, acting in a manner similar to a proxy, connecting back to the exchange's central system.

ECNs will generally forego the gateway/proxy, and their GUI or the API will connect directly to a central system, across a leased line.

Many brokers develop their own systems, although there are some third-party solutions providers specializing in this area. Like ECNs, brokers will often offer both a GUI and an API (although it's likely that a slightly smaller proportion of brokers offer an API, as compared with ECNs), and connectivity is typically direct to the broker's systems, rather than through a gateway.

Investment banks and other dealers have far more complex technology requirements, as they have to interface with multiple exchanges, brokers and multi-dealer platforms, as well as their own pricing, P&L, trade processing and position-keeping systems. Some banks will develop their own etrading systems in-house, but this can be costly, especially when they need to connect to many exchanges, ECNs and brokers. There are a number of companies offering solutions in this area.

ADVANTAGES OF E TRADING:

The increase of eTrading has had some important implications:

Reduced cost of transactions –

By automating as much of the process as possible (often referred to as "straight-through processing" or STP), costs are brought down. The goal is to reduce the incremental cost of trades as close to zero as possible, so that increased trading volumes don't lead to significantly increased costs. This has translated to lower costs for investors.

Greater liquidity –

electronic systems make it easier to allow different companies to trade with one another, no matter where they are located. This leads to greater liquidity (i.e. there are more buyers and sellers) which increases the efficiency of the markets.

Greater competition –

While etrading hasn't necessarily lowered the cost of entry to the financial services industry, it has removed barriers within the industry and had a globalisation-style competition effect. For example, a trader can trade futures on Eurex, Globex or LIFFE at the click of a button - he or she doesn't need to go through a broker or pass orders to a trader on the exchange floor.

Increased transparency –

Etrading has meant that the markets are less opaque. It's easier to find out the price of securities when that information is flowing around the world electronically.

Tighter spreads –

The "spread" on an instrument is the difference between the best buying and selling prices being quoted; it represents the profit being made by the market makers. The increased liquidity, competition and transparency means that spreads have tightened, especially for commoditised, exchange-traded instruments.