Trading mechanism

Details about the trading mechanisms in Indian Capital Market

1. CAPITAL MARKET MODULE II

2. TRADING MECHANISM OF STOCK EXCHANGE

3. 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”

4. 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.

5. 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

6. 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

7. 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- Provide information about the available investment opportunities Provide necessary financial periodicals, prospectus and reports of companies. Provide competent representatives who can solve the investment problems.

8. 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.

9. 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

10. 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.

11. 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 ( C otn )

12. 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.

13. 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. Different types of orders ( Cotn )

14. 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. Different types of orders ( Cotn )

15. Different types of orders ( Cotn ) ( 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.

16. TYPES OF ORDERS Buy orders Sell orders Price based orders Price limit order Stop loss order Best price/ Market orders Time based orders Day order Good till day order Immediate or cancel order Discretionary order Volume condition (Un)Disclosed value order Minimum fill order All or none order

17. 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.

18. 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..

19. 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.

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

21. Logging on User id Trading member id password

22. 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.

23. 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.

24. 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

25. 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.

26. 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.

27. 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.