Page 99 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes Objectives

After studying this unit, you will be able to:
Explain the advantages of the screen-based trading system
Discuss the market types
Elaborate the order management
Discuss the trade management

Introduction

Most of the trading in the Indian stock market takes place on its two stock exchanges: the
Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been in
existence since 1875. The NSE, on the other hand, was founded in 1992 and started trading in
1994. However, both exchanges follow the same trading mechanism, trading hours, settlement
process, etc. At the last count, the BSE had about 4,700 listed firms, whereas the rival NSE had
about 1,200. Out of all the listed firms on the BSE, only about 500 firms constitute more than 90%
of its market capitalization; the rest of the crowd consists of highly illiquid shares.

5.1 Screen-based Trading System

In the past, the trading on stock exchanges in India was based on open outcry system. Under the
system, brokers assemble at a central location usually the exchange trading ring, and trade with
each other. This was time consuming, inefficient and imposed limits on trading volumes and
trading hours. In order to provide efficiency, liquidity and transparency, NSE introduced a
nation-wide on-line, fully-automated Screen-based Trading System (SBTS). Under this system a
trading member can punch into the computer, the number of securities and the prices at which
he would like to transact. The transaction is executed as soon as it finds a matching sell or buys
order from a counter party. This system was readily accepted by market participants and in the
very first year of its operation, NSE became the leading stock exchange in the country.

Technology has been used to carry the trading platform from the trading hall of stock exchanges
to the premises of brokers. NSE carried the trading platform further to the PCs at the residence
of investors through the Internet. This made a huge difference in terms of equal access to
investors in a geographically vast country like India.

The trading network is depicted in Figure 5.1. NSE has a main computer which is connected
through Very Small Aperture Terminal (VSAT) installed at NSE office. The main computer runs
on a fault tolerant STRATUS mainframe computer at the Exchange. Brokers have terminals
(identified as the PCs in the Figure 5.1) installed at their premises which are connected through
VSATs/leased lines/modems.
5.1.1 Advantages of the Screen-based Trading System

Screen-based trading system consists of the following advantages:
It 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, irrespective of their geographical locations, to trade with
one another simultaneously, improving the depth and liquidity of the market.

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