Page 33 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes Screen-based Trading

The trading on stock exchanges in India used to take place through open outcry without use of
information technology for immediate matching or recording of trades. This was time consuming
and inefficient. This imposed limits on trading volumes and efficiency. In order to provide
efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully-automated
screen based trading system (SBTS) where a member can punch into the computer quantities of
securities and the prices at which he likes to transact and the transaction is executed as soon as it
finds a matching sale or buy order from a counter party. SBTS electronically matches orders on
a strict price/time priority and hence cuts down on time, cost and risk of error, as well as on
fraud resulting in improved operational efficiency. It allows faster incorporation of price sensitive
information into prevailing prices, thus increasing the informational efficiency of markets. It
enables market participants to see the full market on real-time, making the market transparent.
It allows a large number of participants, irrespective of their geographical locations, to trade
with one another simultaneously, improving the depth and liquidity of the market. It provides
full anonymity by accepting orders, big or small, from members without revealing their identity,
thus providing equal access to everybody. It also provides a perfect audit trail, which helps to
resolve disputes by logging in the trade execution process in entirety. This diverted liquidity
from other exchanges and in the very first year of its operation, NSE became the leading stock
exchange in the country, impacting the fortunes of other exchanges and forcing them to adopt
SBTS also. As a result, manual trading disappeared from India. Technology was used to carry the
trading platform to the premises of brokers. NSE carried the trading platform further to the PCs
in the residences of investors through the Internet and to hand-held devices through WAP for
convenience of mobile investors. This made a huge difference in terms of equal access to investors
in a geographically vast country like India.
Trading Cycle

The trades accumulated over a trading cycle and at the end of the cycle, these were clubbed
together, and positions were netted out and payment of cash and delivery of securities settled
the balance. This trading cycle varied from 14 days for specified securities to 30 days for others
and settlement took another fortnight. Often this cycle was not adhered to. Many things could
happen between entering into a trade and its performance providing incentives for either of the
parties to go back on its promise. This had on several occasions led to defaults and risks in
settlement. In order to reduce large open positions, the trading cycle was reduced over a period
of time to a week. The exchanges, however, continued to have different weekly trading cycles,
which enabled shifting of positions from one exchange to another. Rolling settlement on T+5
basis was introduced in respect of specified scrips reducing the trading cycle to one day. It was
made mandatory for all exchanges to follow a uniform weekly trading cycle in respect of scrips
not under rolling settlement. All scrips moved to rolling settlement from December 2001. T+5
gave way to T+3 from April 2002 and T+2 since April 2003. The market also had a variety of
deferral products like modified carry forward system, which encouraged leveraged trading by
enabling postponement of settlement. The deferral products have been banned. The market has
moved close to spot/cash market.

Derivatives Trading

To assist market participants to manage risks better through hedging, speculation and arbitrage,
SC(R)A was amended in 1995 to lift the ban on options in securities. However, trading in
derivatives did not take off, as there was no suitable legal and regulatory framework to govern
these trades. Besides, it needed a lot of preparatory work – the underlying cash markets
strengthened with the assistance of the automation of trading and of the settlement system; the
exchanges developed adequate infrastructure and the information systems required to

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