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EQUITYMARKETSIN

INDIA(2)

Smita Roy

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SECONDARY MARKET IN EQUITIES:

STRUCTURES Trading sessions: Continuous trading and call market

trading

Execution system: Quote-driven; order driven and

brokered

Order driven markets:

Order matching rules

Trade pricing rules

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FILLING A LARGE ORDER IN A

CONTINOUS TRADING MARKET

BUYER BID SIZE LIMIT PRICE OFFER SIZE SELLER

A 15 101.1

B 8 101.2

C 10 101.3

101.4 4 D

101.5 6 E

101.6 12 F

BUYER X SUBMITS A DAY ORDER TO BUY 15 CONTRACTS LIMIT 101.5?

WITH WHOM DOES HE TRADE AND AT WHAT PRICE?

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TRADING

Two ways of organizing trading activity:

Open outcry system: Trade shout and resort to signals on thetrading floor of the exchange consisting of different notional

trading posts for different securities

Members willing to buy/sell a security reaches the post

Buyers make bids and sellers make offers and bargains closedat mutually agreed upon prices

Role of the jobber important

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TRADING

Two ways of organizing trading activity:

Screen based system Trading ring replaced by computer screen

Distant participants can trade with each other

Enhances informational efficiency

Permits market participants to get full view of market

Transparent audit trails

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EQUITY TRADING

With NSE: India entered era of screen based trading

NSE trading system called 'National Exchange forAutomated Trading' (NEAT) : fu l ly automated screen

based trading system, order driven market

Screen based system has supplemented the open

outcry systemBuyers and sellers place their orders on their

computer: Limit orders & market orders

Computer mutually matches compatible ordersLimit order book: list of unmatched orders

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NATIONAL STOCK EXCHANGE Ringless, national , automated exchange

NEAT: Working

Trading members in capital market segment connected to a

central computer in Mumbai through a satellite link up using

VSATs (Very Small Aperture Terminals)

Screen based trading system (SBTS): Key benefits

Order driven system: price/time priority

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MARKETSEGMENTS

Limited Physical Market

Pursuant to the directive of SEBI to provide an exit

route for small investors holding physical shares in

securities mandated for compulsory dematerialised

settlement, the Exchange has provided a facility for

such trading in physical shares not exceeding 500

shares

Limited Physical Market was introduced on June 7,

1999.

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LIMITEDPHYSICALMARKET

Trading is conducted in the Odd Lot market

Order quantities should not exceed 500 shares.

The base price and price bands applicable in the Limited Physical

Market are same as those applicable for the corresponding Normal

Market on that day.

Trading hours same as that of the normal market and order entry duringthe pre-open and post-close sessions are not allowed.

Settlement for all trades would be done on a trade-for-trade basis

Orders get matched when both the price and the quantity match in the

buy and sell order. Orders with the same price and quantity match on

time priority i.e. orders which have come into the system before will getmatched first.

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BLOCKTRADINGSESSIONS

separate trading window to facilitate execution of large trades from

November 14, 2005.Block window sessions are available 35 minutes from the beginning of

normal market trading hours i.e. the trading window shall normally remain

open from 09:15 hours to 09:50 hours.

Order should be of a minimum quantity of 5,00,000 shares or minimum value

of Rs. 5 crore whichever is lower.

Orders will get matched when both the price and the quantity match for the

buy and sell order. Orders with the same price and quantity will match on

time priority i.e. orders which have come into the system before will get

matched first.

The securities, base price, alert quantity applicable in the block trade session

shall be same as those applicable for the corresponding Normal Market onthat day. But as per SEBI requirement, member is required to put orders at a

price not exceeding +/-1% from the previous close price/adjusted base

price/ruling market price, as applicable, of normal market.

Market orders are not allowed for BL series.

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NSE MARKETTIMINGS

Market Timings

Trading on the equities segment takes place on all days of theweek (except Saturdays and Sundays and holidays declared by

the Exchange in advance). The market timings of the equities

segment are:

A) Pre-open session

Order entry & modification Open : 09:00 hrs

Order entry & modification Close : 09:08 hrs*

*with random closure in last one minute. Pre-open order matchi

starts immediately after close pf pre-open order entry.

B) Regular trading session

Normal / Retail Debt / Limited Physical Market Open : 09:15 hrs

Normal / Retail Debt / Limited Physical Market Close : 15:30 hr

Block deal session is held between 09:15 hrsand 09:50 hrs

C) The Closing Session is held between 15.40 hrsand 16.00 h

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POSTCLOSESESSION

providing Trading Session after normal market hours in Capital Market

Segment, 'Closing Session' : from June 16, 2003.

Closing Session is available only in Normal Market Segment.

Timings will be 3.40 PM to 4.00 PM

Only market price orders are allowed.

Trading will take place at single price i.e. close price of a security.

Special Terms, Stop Loss and DQ orders are not allowed. Trades will be considered as Normal Market trades.

The post close session facility is available to all the securities which are

eligible for trading in Normal market in CM segment. However, if securities

not traded in the normal market session will not be allowed to participate in

the Closing Session.

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NEAT SYSTEM

Normal Market

All orders which are of regular lot size or multiples thereofare traded in the Normal Market. For shares that are

traded in the compulsory dematerialised mode the

market lot of these shares is one.

Odd Lot MarketAll orders whose order size is less than the regular lot

size are traded in the odd-lot market. An order is called

an odd lot order if the order size is less than regular lot

size. . In an odd-lot market, both the price and quantityof both the orders (buy and sell) should exactly match for

the trade to take place. Currently the odd lot market

facility is used for the Limited Physical Market as per the

SEBI directives.

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CIRCUITBREAKERS

The index-based market-wide circuit breaker system applies at 3

stages of the index movement, either way viz. at 10%, 15% and 20%.

These circuit breakers when triggered bring about a coordinated trading

halt in all equity and equity derivative markets nationwide. The market-

wide circuit breakers are triggered by movement of either the BSE

Sensex or the NSE CNX Nifty, whichever is breached earlier. In thisregard the Exchange has issued a circular no 85/2013 (Download No-

24709) dated October 11, 2013.

Exchange shall compute the Index circuit breaker limits for 10%, 15%

and 20% levels on a daily basis based on the previous day's closinglevel of the index rounded off to the nearest tick size.

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.

.

Trigger limit Trigger time Market halt duration

Pre-open call

auction session post

market halt

10%

Before 1:00 pm. 45 Minutes 15 Minutes

At or after 1:00 pm

upto 2.30 pm15 Minutes 15 Minutes

At or after 2.30 pm No halt Not applicable

15%

Before 1 pm 1 hour 45 minutes 15 Minutes

At or after 1:00 pm

before 2:00 pm45 Minutes 15 Minutes

On or after 2:00 pm Remainder of theday

Not applicable

20%Any time during

market hours

Remainder of the

dayNot applicable

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NATIONAL STOCK EXCHANGE

Working of the NEAT (National exchange for Automated

trading) System

Normal market/ Odd lot

Corporate hierarchy

Trading member ID

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BOMBAY STOCK EXCHANGE BSE oldest organized exchanges in the world

Established in 1875, the BSE was Asias oldest stock exchange

After the BSE, the Ahmedabad Stock Exchange was set up in

1894

In the 20th century, 20 more regional exchanges were set upthroughout India

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BSE

Open outcry system to screen-based system in 1995:

BOLT (BSE On Line Trading)

Initially BOLT was both quote driven and order

driven

October 1996, SEBI permitted BSE to extend BOLT

network outside Mumbai

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DEMUTUALIZATIONOFSTOCKEXCHANGES

Till 1990s stock exchanges were mutual

ventures: cooperatively owned by members who

had trading privileges

Transformed into profit-making companies, withissue of shares

Incentive to offer new products and services,

increase trading volume and lower costs

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BSE INMUTUALISEDSTOCKEXCHANGEERA

To trade at the stock exchanges, brokers had to purchase

trading cards.

Stock exchanges rarely issued new cards, though they

sometimes auctioned the trading cards of defaulting members

Trading cards were handed down from one generation to next:

strong demand for these trading cards made them very

expensive.

Brokers of the stock exchange were organised as partnership

firms with limited capital: BSE brokers resisted any change to

their organisational structure

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SETTLEMENT

Earlier settlement on the basis of weekly account period

Purchases and sales during an account period squared up

and at the end of the account period, transactions settled

on net basis

Weekly settlement system and badla system: lack of

transparency and speculative activity

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POST CLOSE SESSION

Closing Session is available only in Normal Market Segment.

Timings will be 3.40 PM to 4.00 PM

Only market price orders are allowed.

Trading will take place at single price i.e. close price of asecurity.

Trades will be considered as Normal Market trades.

The post close session facility is available to all the securities

which are eligible for trading in Normal market in CM segmenHowever, if securities not traded in the normal market session

will not be allowed to participate in the Closing Session.

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Normal Market

All orders which are of regular lot size or multiples thereof

are traded in the Normal Market. For shares that are traded

in the compulsory dematerialised mode the market lot ofthese shares is one.

Odd Lot Market

All orders whose order size is less than the regular lot size

are traded in the odd-lot market. An order is called an odd

lot order if the order size is less than regular lot size.

Both the price and quantity of both the orders (buy and

sell) should exactly match for the trade to take place.Currently the odd lot market facility is used for the Limited

Physical Market as per the SEBI directives.

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QUALITYOFMARKET

Timely and accurate information

Liquidity: Depth, Breadth, Resilience

Transaction costs: Internal efficiency

Informational efficiency: external efficiency

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INDEX CONSTRUCTION AND

MANAGEMENT

1. TARGET MARKET AND SECURTIY

SELECTION

2. INDEX WEIGHTING

PRICE WEIGHTING

EQUAL WEIGHTING

MARKET CAPITALISATION

FREE FLOAT MARKET CAPITALISATION

FUNDAMENTAL WEIGHTING

3. REBALANCING AND RECONSTITUION

4. USES OF MARKET INDICES

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PRICE WEIGHTED EQUITY INDEX

SECUR

ITY

SHARE

S IN

INDEX

BOP

PRICE

VALUE

(SHAR

ES xBOP

PRICE)

EOP

PRICE

VALUE

(SHAR

ES xEOP

PRICE)

BOP

WEIGHT

%

PRICE

RETURN

%

BOP WEIGHT

X PRICE

RETURN %

1 2 3 5 6 4

A 1 50 50 55 55 49.26 10 4.93

B 1 25 25 22 22 24.63 -12 -2.96

C 1 12.50 12.50 8 8 12.32 -36 -4.43

D 1 10 10 14 14 9.85 40 3.94

E 1 4 4 6 6 3.94 50 1.97

SUM 101.5 105 100 3.45

Index 20.3 21

MARKET CAP WEIGHTEDINDEX

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MARKET CAP WEIGHTEDINDEXSECURI

TY

SHARE

S

OUTST

ANDIN

G

BOP

PRICE

BOP

MARKET

CAP

EO

P

PRI

CE

EOP

MARKET

CAP

BOP

WEIG

HT %

PRICE

RETURN

%

BOP

WEIGH

T X

PRICE

RETUR

N %

A 3000 50 150000 55 165000 26.29 10 2.63

B 10000 25 2250000

5

22 220000 43.82 -12 -5.26

C 5000 12.50 62,500 8 40000 10.96 -36 -3.95

D 8000 10 80000 14 112,000 14.02 40 5.61

E 7000 4 28000 6 42000 4.91 50 2.46

SUM 570,500 579000 100 1.49

Index 1000 1014.90

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The S&P CNX Nifty Well diversified 50 stock index accounting for 22 sectors of the

economy S&P CNX Nifty is owned and managed by India Index Services

and Products Ltd. (IISL), which is a joint venture between NSE

and CRISIL

From June 26, 2009, S&P CNX Nifty is computed based onfree float methodology.

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SENSEX

Bombay Stock Exchange Sensitive Index

30 sensitive shares from specified and non-

specified groups

Factors considered are listing history, trading

frequency, market capitalization

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BSE Sensex

Mar'14 Feb'14 Jan'14 Dec'13 Nov'13 Oct'13

HIGH 21333.20 21140.51 21409.66 21483.74 21321.53 21205.44

LOW 20920.98 19963.12 20343.78 20568.70 20137.67 19264.72

CLOSE 21276.86 21120.12 20513.85 21170.68 20791.93 21164.52

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Use of market Indices

Gauges of market sentiment

Proxies for measuring and modeling returns,

systematic risk, and risk-adjusted performance

Proxies for asset classes in asset allocation

models

Benchmarks for actively managed portfolios

Model portfolios for index funds and exchange

traded funds

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Issues in constructing an Index

Reliability: Are indices based on samples reliable?

Trade-off: What is the trade-off between

diversification and liquidity?

Choice: Purpose of the index

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Indices around the world

Dow Jones Industrial Average: 30 large blue-

chip corporations in US: Price weighted index

Standard & Poors Composite 500: 500 US

stocks, value-weighted index

Nikkei: largest 225 stocks of Tokyo Stock

Exchange

FTSE: 100 large London Stock Exchange stocks,

value-weighted

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Rolling settlement

In a phased manner from 2002

Every day a new settlement period

Settlement of all trades :T + 2,

T is the trading day For all trades executed on trading day .i.e.T day

the obligations are determined on the T+1 dayand settlement on T+2 basis i.e. on the 2ndworking day. For arriving at the settlement day allintervening holidays, which include bankholidays, NSE holidays, Saturdays and Sundays

are excluded.

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:

Activity Day

Trading Rolling Settlement Trading T

Clearing Custodial Confirmation T+1 working days

Delivery Generation T+1 working days

Settlement Securities and Funds pay in T+2 working days

Securities and Funds pay out T+2 working daysValuation Debit T+2 working days

Post Settlement Auction T+2 working days

Auction settlement T+3 working days

Bad Delivery Reporting T+4 working days

Rectified bad delivery pay-in and

pay-out

T+6 working days

Re-bad delivery reporting and

pickupT+8 working days

Close out of re-bad delivery and

funds pay-in & pay-outT+9 working days

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NSCCL

NSCCL :clearing and settlement of the tradesexecuted in the equities and derivatives segmentsof the NSE.

operates a well-defined settlement cycle andthere are no deviations or deferments from thiscycle

It aggregates trades over a trading period, nets

the positions to determine the liabilities ofmembers and ensures movement of funds andsecurities to meet respective liabilities.

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Type of Stock market indices

Price weighted index: Index reflecting sum of

prices of sample stock on a certain date in

relation to a base date

Equal weighted index: Arithmetic average of

price relatives of a sample stocks on a certain

date relative to a base date

Value weighted index: Aggregate market

capitalization of the sample stocks on the

certain date in relation to a Base date

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FIMMDA-NSE MIBID MIBOR

NSE had developed and launched the NSE MumbaiInter-bank Bid Rate (MIBID) and NSE Mumbai Inter-bank Offer Rate (MIBOR) for the overnight moneymarket on June 15, 1998

NSE launched the 14-day NSE MIBID MIBOR onNovember 10, 1998 and the longer term money marketbenchmark rates for 1 month and 3 months onDecember 1, 1998. Further, the exchange introduced a

3 Day FIMMDA-NSE MIBID-MIBOR on all Fridays witheffect from June 6, 2008 in addition to existingovernight rate.