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Business Environment

Notes 2.3.6 Stock Exchange Operations

1. Bulls and Bear: A bull is a buyer in the stock market. He is optimistic about the security
prices. A bear is a seller of securities. His expectation is that the market would go down.
When a bear sells without owning the shares, it is called short trade.
2. Order/Customer Driven and Quote/ Dealer Driven Trading System: Trading in a stock
exchange takes place either on the basis of the auction system on a trading floor which is
order-driven or customer driven or a broker-dealer market which is quote - driven or
dealer - driven. In an-order driven system, customers buy and sell orders and reach at
central point where they are matched. In a quote driven system dealers compete to give
customers the best price.
3. Market Maker: Market makers make both bid and offer at the same time. The quoted price
they would charge from a prospective buyer is offer price or asking price. The quoted
price which they would pay to a prospective seller of a security is known as bid price.
4. Margin Trading: When investors buy securities on margin, they buy some shares with
cash and borrow from the broker to pay for additional shares, using the paid shares as
collateral. The margin customer has to sign a margin agreement, pledging securities as
loan collateral.

To lend the clients margined securities, the brokers also ask the customers to sign a stock loan
consent form.

2.3.7 Badla System/Carry Forward Transactions

The Badla System involves trading for clearing with a facility of carrying forward the transaction
from one settlement period to another. They don't pay the entire amount at the time of the
purchase but against the security of blank transfer deed and share certificates. The Badla rates
were fixed on the basis of demand and supply conditions and were on a fortnightly basis. Badla
led to high speculative activity which is why this system was banned by SEBI since December
1993 and later was introduced in a modified manner. Badla system involves following:

1. Transfer of Market Position: Carry forward facility means that the buyer/seller can either
settle the transactions at the end of a settlement period by actual payment/receipt and
acceptance/transfer of the security or carry forward the transactions from one settlement
period to another by reversing the transactions.

2. Short Lending/Short Selling: Short sellers are those who sell shares without owning them.
Thus they provide scope for higher investment. In a falling market, the short seller has to
purchase to cover his sales position. Similarly, in a rising market those who have contracted
to purchase, have to sell securities to square their position, thus arresting further rise in
share prices.
In November 18, 1996, the SEBI decided to make it mandatory for short sellers to report
their short sales position at the end of each day.
3. Borrowing/Lending in Money Market: In the Badla system both bulls and bears either
need resources to cover their position till the next settlement or have surplus resources. As
a result, in most cases, either they have to borrow from the money market or they turn
into lenders to the money market.

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