Trading in Stock Markets
How is trading done in a Stock Exchange
Screen Based Trading
Earlier, trading on stock exchanges in India used to take place through the open outcry system without use of Information Technology for immediate recording of trades. This was time consuming and inefficient. To improve efficiency and trading volumes and provide further transparency, NSE introduced a nationwide, online, fully automated screen-based trading system (SBTS) whereby a member can perform the trade on a computer system and orders and matches can be found easily.
NEAT
NSE is the first exchange in the world to use satellite communication technology for trading. Its trading system called National Exchange for Automated Trading (NEAT), is a state-of-the-art client server based application. At the server end all trading information is stored in an in memory database to achieve minimum response time and maximum system availability for users.
Types of Market under NEAT:
- Normal market: The market for regular lot sizes or multiples thereof are traded in normal market.
- Odd lot market: The market for lot sizes which are different from the regular lot sizes.
- Auction market: The market for trades initiated by the exchange on behalf of trading members for settlement related reasons.
- RETDEBT Market: This facility of the NEAT trading system is used for transactions in the Retail Debt Market sessions.
Virtual NEAT Screen
Investor's Access to Internet Based Trading System
There are many brokers on NSE who provide Internet based trading facility to their clients. Internet based trading enables an investor to buy/sell securities through internet which can be accessed from a computer at the investor's residence or anywhere else where the client can access the internet. Investors need to get in touch with an NSE broker providing this service to avail of internet based trading facility.
Contract Note - Contract note is a confirmation of trades done on a particular day on behalf of the client by a trading member. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades. It also helps to settle disputes/claims between the investor and the trading member. It is a pre requisite for filing complains or arbitration proceeding against the trading member in case of a dispute. A valid contract note should be in the prescribed form, containing detail of trades, stamped with requisite value and duly signed by authorized signatory. Contract notes are kept in duplicate, the trading member and the client should keep one copy each. After verifying details contained
Therein, the client keeps one copy and returns the second copy to the trading member duly acknowledged by him.
Details required to be mentioned on the contract note issued by the stock broker
- Name, address and SEBI Registration number of the Member broker
- Name of partner/proprietor/Authorised signatory
- Dealing office address/Telephone no./Fax no./Code number of the member given by the exchange
- Contract number/date of issue of contract note, settlement number and time period of settlement
- Constituent (Client) name/Code number
- Order number and Order time corresponding to trades
- Trade number and Trade time
- Quantity and kind of security bought/sold by client
- Brokerage and purchase/sale rate
- GST rates, Securities Transaction Tax and other charges levied by the broker
- Appropriate stamps have to be affixed on the contract note or it is mentioned that the consolidated stamp duty is paid
- Signature of stock broker/Authorized Signatory
Brokerage: Brokerage charges levied on trades depend on the broker and differ on a relative basis. However, the maximum brokerage charged cannot be more than 2.5% of the value mentioned in the respective purchase or sale note.
Registration of the Broker or Sub-Broker
To verify whether the broker/sub broker is registered or not one should check for registration certificate issued by SEBI.A broker's registration number begins with the letter "INB" and that of a sub broker begins with "INS".
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 took off much later after a suitable legal and regulatory framework was out in place. The market presently offers index futures and index options on the benchmark indices of NSE and BSE and various other indices and single stock futures and options.
Foreign Investment in Stock Exchanges
Foreign Investment up to 49% has been allowed, in December, 2006, in infrastructure companies in the securities markets, viz. Stock exchanges, depositories and clearing corporations, with separate Foreign Direct Investment (FDI) cap of 26% and Foreign Institutional Investment (FII) cap of 23%.
Volatility Index (VIX)
With rapid changes in volatility in securities market from time to time, a need was felt for an openly available and quoted measure of market volatility in the form of an index to help market participants. Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualised volatility, denoted in percentage (e.g. 20%) based on the order book of the underlying index options. On April 08, 2008, NSE launched the Volatility Index, India VIX, based on the Nifty 50 Index Option prices. From the best bid-ask prices of Nifty 50 Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days. The India VIX is a simple but useful tool in determining the overall volatility of the market.
The Exchange launched a Securities Lending & Borrowing Scheme (SLBS) on April 21, 2008. The Exchange provides automated, screen based, order matching platform to participants to execute lending and borrowing transactions. Securities available for trading in F&O segment of the Exchange have been initially permitted to trade in this segment. The SLBS was revised from December 22, 2008 to increase the trading time & the lending/borrowing period.
Launch of Currency Futures in India
On August 29, 2008, NSE launched trading in currency future contracts for the first time in India followed by BSE on October 1, 2008 and MCX-SX on October 7, 2008. To start with, 12 monthly future contracts on the VIX on the website of nseindia.com
VIX on the website of nseindia.com
Launch of Securities Lending &. Borrowing Scheme
A Securities Lending & Borrowing mechanism allows market participants to take short positions effectively with less cost. It also provides the holder of idle securities with an alternative to earn a return on such holdings without risk.
USD-INR pair have been made available for trading. The minimum lot size has been kept small at USD$1000 and applicable margins are also comparably very low due to the less volatile nature of the underlying asset.
Direct Market Access
During April 2008, Securities & Exchange Board of India (SEBI) allowed direct market access (DMA) facility to the institutional investors. DMA allows brokers to offer clients direct access to the exchange trading system through the broker's infrastructure without manual intervention by the broker. DMA facility gives clients direct control over orders, helps in faster execution of orders, reduces the risk of errors from manual order entry and lends greater transparency and liquidity. DMA also leads to lower impact cost for large orders, better audit trails and better use of hedging and arbitrage opportunities through the use of decision support tools/ algorithms for trading.
Cross Margining
Many trading members undertake transactions in both the cash and derivative segments of an Exchange. They keep separate deposits with the exchange for taking positions in two different segments. In order to improve the efficiency of the use of the margin capital by market participants and as an initial step towards cross margining across cash and derivatives markets, SEBI allowed Cross Margining benefit to institutional investors in May 2008.
In December 2008, SEBI extended the cross margin facility across Cash and F&O segment to all the market participants.
On February 9, 2009, Cross margining was made available for positions across index futures to stock/stock futures and stock futures to stocks. It is available to all categories of market participant and benefit is computed on online real time basis.
