Trading mechanism

CAPITAL MARKET MODULE II

TRADING MECHANISM OF STOCK EXCHANGE

INTRODUCTION The trading on stock exchange in INDIA

was open outcry method. This was time consuming and

inefficient. This imposed limits on trading volumes

and efficiency. In order to provide efficiency, liquidity,

and transparency NSE and BSE introduced nation wide online fully automated “SCREEN BASED TRADING SYSTEM”

SCREEN BASED TRADING SCREEN BASED TRADING NSE’s screen

based trading is known as NEAT- National exchange for automated trading.

BSE’S screen based trading is known as BOLT- Bombay online trading.

Here order are match on the basis of time and price priority.

TRADING PROCEDURES A non member is not permitted to enter

the hall of the stock exchange and cannot carry on biz transactions personally.

Following are the steps involved in the trading (buying & selling) on the stock exchange

STEP 1 : FINDING A BROKER STEP 2 : OPENING AN ACCOUNT WITH

THE BROKER STEP 3 : PLACING THE ORDER STEP 4 : EXECUTING THE ORDER STEP 5 : PREPRATION OF CONTRACT

NOTES STEP 6 : SETTLEMENT OF CONTRACTS

TRADING PROCEDURES

STEP 1 : FINDING A BROKER

Select a broker for transacting business on behalf of the investor.

The stock broker is a licensed member of a stock exchange. A buyer of securities selects a broker who-i. Provide information about the available

investment opportunitiesii. Provide necessary financial periodicals,

prospectus and reports of companies.iii. Provide competent representatives who can

solve the investment problems.

STEP 2 : OPENING AN ACCOUNT WITH THE BROKER

After selection of the broker the investor will proceed to open an account with the broker. A broker opens an account in the name of prospective client only if he is satisfied about the credit worthiness of the investor. If the broker is satisfied, he will open an account in the name of that customer by writing his name in the brokers book.

STEP 3 : PLACING THE ORDER After selection of broker & opening an

account, the investor places an order to buy a specified no of shares of a specified company.

Order can be placed by telephone, fax or in person.

The order should be in clear and precise terms

Different types of orders BUY ORDERS Buy orders are placed when the security price is

expected to rise in price. If the investor is satisfied by the current price, he can decide how much quantity to be bought at a prescribed rate .

SELL ORDERS Placed when you want to dispose the security

your own, usually at a estimated price or when a decline in price is expected.

Limit order It is an order for the purchase or sale of securities at a

fixed price specified by the client. “ buy at Rs. 50 or less” “ sell at Rs. 60 or more” No guarantee that limit order will be executed Fixed price order When the client specifies the price at which the shares

are to be purchased, it is known as fixed price order. Stop loss order It is an order to sell as soon as the price falls up to a

particular level or to buy when the price rises up to a specified level. This is mainly to protect the clients against a heavy fall or rise in price. So that they may not suffer more than the specified unit.

Different types of orders (Cotn)


Stop loss sell order - A sell order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or falls below the trigger price of the order.

Stop loss buy order - A buy order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or exceeds the trigger price of the order.

Best price/ Market orders A market order is an order executed at the

current market price. It will be executed at the prevailing price on the exchange.

Discretionary Order It is an order to buy or sell securities at

whatever price the broker thinks reasonable. This is possible when the client has complete faith on the broker.

Limited Discretionary Order It is an order to buy or sell securities within a

specified price range and within the given time period as per the judgment of the broker.

Immediate or Cancel Order A trader releases this type of order in to the

market for immediate execution. If the price is not matched, the order is cancelled, and fresh order has to be placed.


Day Order These orders are valid for the day in which

they were put in to the system. If they are not executed till the close of the trading on the day, at the end of the day they are automatically cancelled.

Good Till Day Order A trader can place an order specifying the

no of days up to which it can remain open. If the price did not reach at the ordered level, at the end of the period the order is automatically cancelled.



(Un)Disclosed value order This type of order enables an investor to release part

of the order value to the market without disclosing the full value.

Minimum fill order A trader can specify the minimum number of orders that

should be filled by fixing upper and lower limits. All or None order A trading member can stipulate conditions that the full

order should be matched. The orders received are processed immediately to check matching. Unmatched orders are stored in different books in the sequence of best prices and time priority.

TYPES OF ORDERS A. Buy ordersB. Sell ordersC. Price based orders

i. Price limit orderii. Stop loss order

D. Best price/ Market ordersE. Time based orders

i. Day orderii. Good till day orderiii. Immediate or cancel order

F. Discretionary orderG. Volume condition

i. (Un)Disclosed value orderii. Minimum fill orderiii. All or none order

STEP 4 : EXECUTING THE ORDER The execution of the orders submitted by

clients takes place between brokers acting on behalf of the investors/clients.

Buy orders are matched with sell orders. In the automated system, trading is

carried out in an anonymous environment and the orders are matched by the computer system.

STEP 5 : PREPRATION OF CONTRACT NOTES

A contract note is a written agreement between the broker and his client for the transaction executed.

It contains the details of the contract made for the purchase or the sale of securities, the brokerage chargeable, the name of the company, number of shares bought or sold, net rate etc..

STEP 6 :SETTLEMENT OF CONTRACTS

Settlement is made by means of delivering the share certificates along with the transfer deed

Settlement of trade is carried out through a separate agency known as clearing house which functions in each stock exchange.

Market phases Opening Pre open(9.00am to 9.15am) Market close(3.50 to 4.00pm) normal

market

Logging on

User id Trading member id password

MECHANISM OF ONLINE TRADING

MECHANISM OF ONLINE TRADING NSE has main computer which is connected through “VERY SMALL APERTURE TERMINAL”(VSAT) installed at its office.

THE main computer runs on a fault tolerant “STRATUS” mainframe computer at the exchange. Brokers have terminals installed at their premises which are connected through VSATS.

HOW TO PLACE ORDER

An investor informs broker to place an order on his behalf.

The broker enters the order through his PC, which runs under windows NT and sends signal to the satellite via VSAT. The signal is directed to mainframe computer at NSE via VSAT at NSE’s office. A message relating to the order activity is broad casted to respective member.

To enter a buy order BASIS OF OPERATION : BASIS OF OPERATION The online

trading operates on the strict basis of PRICE PRIORITY and TIME PRIORITY

HOW TO ENTER SELL ORDER : HOW TO ENTER SELL ORDER Same

as the process involved in the placing of the buy order

To enter a Sell order

LOGGING ON :

LOGGING ON On starting NEAT application, the logon screen appears with the following details. USER ID TRADING MEMBER ID PASSWORD NEW PASSWORD.

TERMINOLOGIES OF ONLINE TRADING

Snap quote:- feature available to get instantaneous market information on a desired security.

Active and Passive orders:- when any order enters the trading system, it is an active order. It tries to find a match on the other side of books. If it finds a match trade is generated,

if does not finds match it turns to passive order which is stored in order book.

Cont.........

Previous trade:- it is to provide security wise information to user for own trades.

outstanding order:-Purpose of outstanding order is to enable user to view the outstanding order for a security. Which has not yet been completely traded or cancelled.

Purpose of MBP is to enable user to view outstanding order in the market, at each price and are display in order of best price.

Education

Trading mechanism