Working of Stock Exchanges

7/30/2019 Working of Stock Exchanges

1/104

BY

RAMESH CHAND

FOURTH SEMESTER


2/104


3/104

Disclosures and listing norms.

Computerized trading.

Future developments.

National Stock Exchange.

Introduction.

Locations.

Listing.

Constitution.

Trading members. Trading mechanism.

Market types.

Order books.

Order matching rules.

Order conditions.

Quantity conditions.

Trading workstation.

Computer to computer links facility.

National Securities Clearing Corporation Limited.

Badla trading.

Substitutes for Badla.

Financial derivatives.

Trading options.

Bibliography.


4/104

EXECUTIVE SUMMARY

The project is an attempt to working of stock exchanges in

detail. It provides thorough knowledge of different aspects

of trading in stock exchanges. The focus is basically with

Indian context. The report is divided in three parts. The

first dealing with the theory, i.e, introduction of securities

market, concept of stock exchanges, their role in

economy, their characteristics, role of SEBI etc.

The second part is the study made of different methods of

trading and In all they offer 9 different avenues for

investing, which have been explained in length in the

pages to come.

The third part is the Case Study RELIANCE DHERUBHAI

AMBHANI


5/104


6/104

invest in such partnerships in the first place, since once

invested, their savings would be very difficult to convert

into cash. And most people have lots of reasons, such as

better investment opportunity, marriage, education,

death, health and so on for wanting to convert their

savings into cash. Clearly then, big enterprises will be able

to raise capital from the public at large only if there were

some mechanism by which the investors could purchase

or sell their share of business as ands they wished to do

so. This implies that ownership in business has to bebroken up into a lager number of small units, such that

each unit may be independently & easily bought and sold

without hampering the business activity as such. Also,

such breaking of business ownership would help mobilize

small savings in the economy into entrepreneurial

ventures. This end is achieved in a modern business through the

mechanism of shares.

What is a share?

A share represents the smallest recognized fraction of ownership in a publicly held business. Each such fraction

of ownership is represented in the form of a certificate

known as a share certificate. The breaking up of total

ownership of a business into small fragments, each

fragment represented by a share certificate, enables them

to be easily bought and sold.


7/104

What is a stock exchange?

The institution where this buying and selling of

shares essentially takes place is the Stock

Exchange.

In the absence of stock exchanges, ie. Institutions where

small chunks of businesses could be traded, there would

be no modern business in the form of publicly held

companies. Today, owing to the stock exchanges, one canbe part owners of one company today and another

company tomorrow; one can be part owners in several

companies at the same time; one can be part owner in a

company hundreds or thousands of miles away; one can

be all of these things. Thus by enabling the convertibility

of ownership in the product market into financial assets,namely shares, stock exchanges bring together buyers

and sellers (or their representatives) of fractional

ownerships of companies. And for that very reason,

activities relating to stock exchanges are also

appropriately enough, known as stock market or security

market. Also a stock exchange is distinguished by aspecific locality and characteristics of its own mostly a

stock exchange is also distinguished by a physical location

and characteristics of its own. In fact, according to

H.T.Parekh, the earliest location of the Bombay Stock

Exchange, which for a long period was known as the


8/104

native share and stock brokers association, was probably

under a tree around 1870!

The stock exchanges are the exclusive centers for the

trading of securities. The regulatory framework

encourages this by virtually banning trading of securities

outside exchanges. Until recently, the area of operation/

jurisdiction of exchange was specified at the time of its

recognition, which in effect precluded competition among

the exchanges. These are called regional exchanges. Inorder to provide an opportunity to investors to invest/

trade in the securities of local companies, it is mandatory

foe the companies, wishing to list their securities, to list on

the regional stock exchange nearest to their registered

office.

Characteristics of Stock Exchanges in India

Traditionally, a stock exchange has been an

association of individual members called memberbrokers (or simply members or brokers), formed for

the express purpose of regulating and facilitating

buying and selling of securities by the public and

institution at large.


9/104

A stock exchange in India operates with due

recognition from the government under the

Securities and Contracts (Regulations) Act, 1956. the

member brokers are essentially the middlemen who

carry out the desired transactions in securities on

behalf of the public(for a commission) or on their own

behalf. New membership to a Stock Exchange is

through election by the governing board of that stock

exchange.

At present, there are 23 stock exchanges in India, the

largest among them being the Bombay Stock

Exchange. BSE alone accounts for over 80% of the

total volume of transactions in shares.

Typically, a stock exchange is governed by a board

consisting of directors largely elected by the member

brokers, and a few nominated by the government.

Government nominee include representatives of the

ministry of finance, as well as some public

representatives, who are expected to safeguard the

public interest in the functioning of the exchanges. Apresident, who is an elected member, usually

nominated by the government from among the

elected members, heads the board. The executive

director, who is usually appointed by the by the stock

exchange with the government approval is the

operational chief of the stock exchange. His duty is to


10/104

ensure that the day to day operations the Stock

Exchange are carried out in accordance with the

various rules and regulations governing its

functioning.

The overall development and regulation of the

securities market has been entrusted to the

Securities and Exchange Board of India (SEBI) by an

act of parliament in 1992.

All companies wishing to raise capital from the public

are required to list their securities on at least one

stock exchange. Thus, all ordinary shares, preference

shares and debentures of the publicly held

companies are listed in the stock exchange.

Exchange management

Made some attempts in this direction, but this did not

materially alter the situation. In view of the less than

satisfactory quality, of administration of broker-managed

exchanges, the finance minister in march 2001 proposed

demutualisation of exchanges by which ownership,management and trading membership would be

segregated from each other. The regulators are working

towards implementing this. Of the 23 stock exchanges in

India, two stock exchanges viz., OTCEI and NSE are

already demutualised. Board of directors, which do not

include trading members, manages these. Theses are


11/104

purest form of demutualised exchanges, where ownership,

management and trading are in the hands of three sets of

people. The concept of demutualisation completely

eliminates any conflict of interest and helps the exchange

to pursue market efficiency and investors interest

aggressively.

Role of SEBI

The SEBI, that is, the Securities and the Exchange Board

of India, is the national regulatory body for the securitiesmarket, set up under the securities and Exchange Board of

India act, 1992, to protect the interest of investors in

securities and to promote the development of, and to

regulate the securities market and for matters connected

therewith and incidental too.

SEBI has its head office in Mumbai and it has now set up

regional offices in the metropolitan cities of Kolkata, Delhi,

and Chennai. The Board of SEBI comprises a Chairman,

two members from the central government representing

the ministries of finance and law, one member from the

Reserve Bank of India and two other members appointedby the central government.

As per the SEBI act, 1992, the power and functions of the

Board encompass the regulation of Stock Exchanges and

other securities markets; registration and regulation of the

working stock brokers, sub-brokers, bankers to an issue (a


12/104

public offer of capital), trustees of trust deeds, registrars

to an issues, merchant bankers, under writers, portfolio

managers, investment advisors and such other

intermediaries who may be associated with the stock

market in any way; registration and regulations of mutual

funds; promotion and regulation of self- regulatory

organizations; prohibiting Fraudulent and unfair trade

practices and insider trading in securities markets;

regulating substantial acquisition of shares and takeover

of companies; calling for information from undertkinginspection, conducting inquiries and audits of stock

exchanges, intermediaries and self- regulatory

organizations of the securities market; performing such

functions and exercising such powers as contained in the

provisions of the Capital Issues (Control) Act,1947 and the

Securities Contracts (Regulation) Act, 1956, levyingvarious fees and other charges, conducting necessary

research for above purposes and performing such other

functions as may be prescribes from time to time.

SEBI as the watchdog of the industry has an important and

crucial role in the market in ensuring that the marketparticipants perform their duties in accordance with the

regulatory norms. The Stock Exchange as a responsible

Self Regulatory Organization (SRO) function to regulate

the market and its prices as per the prevalent regulations.

SEBI and the Exchange play complimentary roles to


13/104

enhance the investor protection and the overall quality of

the market.

Membership

The trading platform of a stock exchange is accessible

only to brokers. The broker enters into trades in

exchanges either on his own account or on behalf of

clients. The clients may place their order with them

directly or a sub-broker indirectly. A broker is admitted tothe membership of an exchange in terms of the provisions

of the SCRA, the SEBI act 1992, the rules, circulars,

notifications, guidelines, etc. prescribed there under and

the byelaws, rules and regulations of the concerned

exchange. No stockbroker or sub-broker is allowed to buy,

sell or deal in securities, unless he or she holds acertificate of registration granted by SEBI. A broker/sub-

broker compiles with the code of conduct prescribed by

SEBI.

The stock exchanges are free to stipulate stricter

requirements for its members than those stipulated by


14/104

SEBI. The minimum standards stipulated by NSE for

membership are in excess of the minimum norms laid

down by SEBI. The standards for admission of members

laid down by NSE stress on factors, such as, corporate

structure, capital adequacy, track record, education,

experience, etc. and reflect the conscious endeavors to

ensure quality broking services.

Listing

Listing means formal admission of a security to the tradingplatform of a stock exchange, invariably evidenced by a

listing agreement between the issuer of the security and

the stock exchange. ; Listing of securities on Indian Stock

Exchanges is essentially governed by the provisions in the

companies act, 1956, SCRA, SCRR, rules, bye-laws and

regulations of the concerned stock exchange, the listingagreement entered into by the issuer and the stock

exchange and the circulars/ guidelines issued by central

government and SEBI.

Index services


15/104

Stock index uses a set of stocks that are representative of

the whole market, or a specified sector to measure the

change in overall behavior of the markets or sector over a

period of time. India Index Services & Products Limited

(IISL), promoted by NSE and CRISIL, is the only specialized

organization in the country to provide stock index

services.

Trading Mechanism

All stock exchanges in India follow screen-based trading

system. NSE was the first stock exchange in the country to

provide nation-wide order-driven, screen-based trading

system. NSE model was gradually emulated by all other

stock exchanges in the country. The trading system at

NSE known as the National Exchange for Automated Trading (NEAT) system is an anonymous order-driven

system and operates on a strict price/time priority. It

enables members from across the countries to trade

simultaneously with enormous ease and efficiency. NEAT

has lent considerable depth in the market by enabling

large number of members all over the country to tradesimultaneously and consequently narrowed the spreads

significantly. A single consolidated order book for each

stock displays, on a real time basis, buy and sell orders

originating from all over the country. The bookstores only

limit orders, which are orders to buy or sell shares at a

stated quantity and stated price. The limit order is


16/104

executed only if the price quantity conditions match. Thus,

the NEAT system provides an open electronic consolidated

limit order book (OECLOB). The trading system provides

tremendous flexibility to the

users in terms of kinds of orders that can be placed on the

system. Several time-related (Good-Till-Cancelled, Good-

Till-Day, Immediate-or-Cancel), price related (buy/sell limit

and stop-loss orders) or volume related (All-or-None,

Minimum Fill, etc.) conditions van be easily built into an

order. Orders are sorted and match automatically by thecomputer keeping the system transparent, objective and

fair. The trading system also provides complete market

information on-line, which is updated on real time basis.

The trading platform of the CM segment of NSE is

accessed not only from the computer terminals from the

premises of brokers spread over 420 cities, but also fromthe personal computers in the homes of investors through

the internet and from the hand-held devices through WAP.

The trading platform of BSE is also accessible from 400

cities.

Internet trading is available on NSE and BSE, as of now.SEBI has approved the use of Internet as an order routing

system, for communicating clients orders to the

exchanges through brokers. SEBI- registered brokers can

introduce internet-based trading after obtaining

permission from the respective Stock Exchanges. SEBI has

stipulated the minimum conditions to be fulfilled by


17/104

trading members to start internet-based trading and

services.

NSE was the first exchange in the country to provide web-

based access to investors to trade directly on the

exchange. It launched Internet trading in February 2000. It

was followed by the launch of Internet trading by BSE in

March 2001. The orders originating from the personal

computers (PCs) of investors are routed through the

Internet tot eh trading terminals of the designated brokerswith whom they have relations and further to the

exchange of trade execution. Soon after these orders get

matched and result into trades, the investors get

confirmation about them on their PCs through the same

Internet routes.

SEBI approved trading through wireless medium or WAP

platform. NSE is the only exchange to provide access to its

order book through the hand held devices, which use WAP

technology. This serves primarily retail investors who are

mobile and want to trade from any place when the market

prices for st0ocks of their choice are attractive.


18/104


19/104

2000, it has been observed that India has achieved a very

high level of dematerialization in less than three years

time, and currently more than 99%of trades settle in

demand form. Competition and regulatory developments

facilitated reduction in custodial charges and

improvements in qualities of service standards. The

paper observes that one imminent and apparent

immediate benefit of competition between the two

depositories is fall in settlement and other charges.

Competition has been driving improvement inservice standards. Depository facility has effected

changes in stock market microstructure. Breadth and

depth of investment culture has further got extended to

interior areas of the country faster. Explicit transaction

cost has been falling due to dematerialization.

Dematerialization substantially contributed to theincreased growth in the turnover. Dematerialization

growth in India is the quickest among all emerging

markets and also among developed markets excepting for

the U.K and Hong Kong.


20/104


21/104

the investors by making available necessary informative

inputs and conducting investor education programmes.

A Governing Board comprising of 9 elected directors (one

third of them retire every year by rotation), two SEBI

nominees, a Reserve Bank of India nominee, six public

representatives and an Executive Director is the apex

body, which decides the policies and regulates the affairs

of the Exchange.

The Executive Director as the Chief Executive Officer is

responsible for the day-to-day administration of the

Exchange.

The average daily turnover of the Exchange during the

year 2000-2001 (April-March), was Rs.3984.19 crores andaverage number of daily trades was 5.69 lakhs. However,

the average daily turnover of the Exchange during the

year 2001- 2002 has declined to Rs. 1244.10 crores and

number of average daily trades during the period to 5.17

lakhs. The ban on all deferral products like BLESS and

ALBM in the Indian capital Markets by SEBI w.e.f. July 2,2001, abolition of account period settlements, introduction

of Compulsory Rolling Settlements in all scrips traded on

the Exchanges w.e.f. December 31, 2001, etc. have

adversely impacted the liquidity and consequently there is

a considerable decline in the daily turnover at the

Exchange.


22/104


23/104

Telephone Nigam Limited with the market capitalization of

Rs.11, 700 crores.

BSE SENSEX

The BSE SENSEX , short form of Sensitive Index, first

compiled in 1986 is a market Capitalization-Weighted

index of 30 component stocks representing a sample of

large, well-established and financially sound companies.

The index is widely reported in both, the domesticinternational, print electronic media and is widely used to

measure the used to measure the performance of the

Indian stock markets.

The BSE SENSEX is the benchmark index of the Indian

capital market and one, which has the longest socialmemory. In fact the SENSEX is considered to be the

pulse of the Indian stock markets. It is the oldest index in

India and has acquired a unique place in collective

consciousness of the investors. Further, as the oldest

index of the Indian Stock Market, it provides time series

data over a fairly long period of time. Small wonder thatthe SENSEX has over the years has become one of the

most prominent brands of the Country.

Objectives of SENSEX

The BSE SENSEX is the benchmark index with wide

acceptance among individual investors, institutional


24/104


25/104

Companies represented in the SENSEX

Company name

(As on 15.06.01)

Sector

Hindustan lever FMCGReliance limited Chemicals and

petrochemicalsInfosys technologies Information technologyReliance petroleum Oil and gas

ITC FMCGState bank of India Finance

MTNL TelecomSatyam computers Information technology

Zee telefilms MediaRanbaxy labs Healthcare

ICICI FinanceLarsen & toubro Diversified

Cipla HealthcareHindalco Metals and mining

HPCL Metal and mining TISCO Metal and mining

Nestle FMCG


26/104

Trading System

Till Now, buyers and sellers used to negotiate face-to-face

on the trading floor over a security until agreement was

reached and a deal was struck in the open outcry system

of trading, that used to take place in the trading ring. The

transaction details of the account period (called

settlement period) were submitted for settlement by

members after each trading session.

The computerized settlement system initiated the netting

and clearing process by providing on daily basis

statements for each member, showing matched and

unmatched transactions. Settlement processing involves

computation of each member's net position in each

security, after taking into account all transactions for the

member during the settlement period, which is 10 working

days for group 'A' securities and 5 working days for group

'B' securities.

Trading is done by members and their authorized

assistants from their Trader Work Stations (TWS) in their

offices, through the BSE On-Line Trading (BOLT) system.


27/104

BOLT system has replaced the open outcry system of

trading. BOLT system accepts two-way quotations from

jobbers, market and limits orders from client-brokers and

matches them according to the matching logic specified in

the Business Requirement Specifications (BRS) document

for this system.

The matching logic for the Carry-Forward System as in the

case of the regular trading system is quote driven with the

order book functioning as an "auxiliary jobber".

TRADING

The Exchange, which had an open outcry trading system,

had switched over to a fully automated computerized

mode of trading known as BOLT (BSE on Line Trading)

System. Through the BOLT system the members nowenter orders from Trader Work Stations (TWSs) installed in

their offices instead of assembling in the trading ring. This

system, which was initially both order and quote driven,

was commissioned on March 14, 1995. However, the

facility of placing of quotes has been removed w.e.f.,

August 13, 2001 in view of lack of market interest and toimprove system-matching efficiency. The system, which is

now only order driven, facilitates more efficient

processing, automatic order matching and faster

execution of orders in a transparent manner.


28/104

Earlier, the members of the Exchange were permitted to

open trading terminals only in Mumbai. However, in

October 1996, the Exchange obtained permission from

SEBI for expansion of its BOLT network to locations outside

Mumbai. In terms of the permission granted by SEBI and

certain modifications announced later, the members of the

Exchange are now free to install their trading terminals at

any place in the country. Shri P. Chidambaram

inaugurated the expansion of BOLT network the then

Finance Minister, Government of India on August 31, 1997.

In order to expand the reach of BOLT network to centers

outside Mumbai and support the smaller Regional Stock

Exchanges, the Exchange has, as on March 31, 2002,

admitted subsidiary companies formed by 13 Regional

Stock Exchanges as its members. The members of theseRegional Stock Exchanges work as sub-brokers of the

member-brokers of the Exchange.

The objectives of granting membership to the subsidiary

companies formed by the Regional Stock Exchanges were

to reach out to investors in these centers via the membersof these Regional Exchanges and provide the investors in

these areas access to the trading facilities in all scrips

listed on the Exchange.

Trading on the BOLT System is conducted from Monday to

Friday between 9:55 a.m. and 3:30 p.m. The scrips traded


29/104


30/104


31/104

meet the relevant norms specified by the Exchange.

Accordingly, to begin with the Exchange has permitted

trading in scrips of five companies listed on other Stock

Exchanges w.e.f. April 22, 2002/

Computation of closing price of scrips in the Cash

Segment:

The closing prices of scrips are computed on the basis of

weighted average price of all trades in the last 15 minutesof the continuous trading session. However, if there is no

trade during the last 15 minutes, then the last traded

price in the continuous trading session is taken as the

official closing price.

A) Compulsory Rolling Segment (CRS):

Compulsory Rolling Settlement (CRS) Segment:

With a view to introduce the best international trading

practices and to achieve higher settlement efficiency, as

mandated by SEBI, trades in all the equity shares listed on

the Exchange in CRS Segment were to be settled on T+5basis w.e.f. December 31, 2001. SEBI has further directed

the Stock Exchanges that trades in all scrips w.e..f. April 1,

2002 should be settled on T+3 basis. Accordingly, all

transactions in all groups of securities in the equity

segment and fixed income securities listed on the

Exchange are settled on T+3 basis w.e.f. April 1, 2002


32/104

Under a rolling settlement environment, the trades done

on a particular day are settled after a given number of

business days rather than settling all trades done during a

period at the end of an 'account period'. A T+3 settlement

cycle means that the final settlement of transactions done

on T or trade day by exchange of monies and securities,

occurs on fifth business day after the trade day.

The transactions in securities of companies which have

made arrangements for dematerialization of theirsecurities by the stipulated date are settled only in Demat

mode on T+3 on net basis, i.e., buy and sale positions in

the same scrip are netted and the net quantity is to be

settled. However, transactions in securities of companies,

which have failed to make arrangements for

dematerialization of their securities or /are in "Z" group,are settled only on trade to trade basis on T+3 i.e., the

transactions are settled on a gross basis and the facility of

netting of buy and sale transactions in a scrip is not

available. For example, if one buys and sells 100 shares of

a company on the same day which is on trade to trade

basis, the two positions will not be netted and he will haveto first deliver 100 shares at the time of pay-in of

securities and then receive 100 shares at the time of pay-

out of securities on the same day. Thus, if one fails to

deliver the securities sold at the time of pay-in, it will be

treated as a shortage and the position will be auctioned/

closed-out.


33/104

In other words, the transactions in scrips of companies

which are in compulsory demat are settled in demat mode

on T+3 on netting basis and the transactions in scrips of

companies, which have not made arrangements for

dematerialization of their securities by the stipulated date

or are in "Z" group for other reasons, are settled on trade

to trade basis on T+3 either in demat mode or in physical

mode.

The settlement of transactions in 'F' group securities

representing Fixed Income Securities is also on Rolling

Settlement Cycle of T+3 basis.

The following tables summarizes the steps in the trading

and settlement cycle for scrips under CRS:

DAY ACTIVITY:

Trading on BOLT and daily downloading of statements

showing details of transactions and margins at the end of

each trading day.

6A/7A entry by the member-brokers.

T+1


34/104


35/104

Statements giving details of the daily transactions entered

into by the members.

Statements giving details of margins payable by the

members in respect of the trades executed by them.

The settlement of the trades (money and securities) done

by a member on his own account or on behalf of his

individual, corporate or institutional clients may be either

through the member himself or through a SEBI registeredCustodian appointed by him or the respective client. In

case the delivery/payment is to be given or taken by a

registered Custodian, he has to confirm the trade done by

a member on the BOLT System through 6A-7A entry. For

this purpose, the Custodians have been given connectivity

to BOLT System and have also been admitted as membersof the Clearing House. In case a transaction is not

confirmed by a registered Custodian, the liability for pay-in

of funds or securities in respect of the same devolves on

the concerned member.

The introduction of settlement on T+3 basis has resultedin reduction in settlement risk, provided early receipt of

securities and monies to buyers and sellers respectively

and brought Indian Capital Markets at the international

standard of settlements


36/104


37/104

basis, i.e., without netting of purchase and sale

transactions in a scrip.

The Delivery Orders provide information like scrip,

quantity and the name of the receiving member to whom

the securities are to be delivered through the Clearing

House. The Money Statement provides scrip wise/item

wise details of payments/receipts for the settlement. The

Delivery/Receive Orders and money statements can be

downloaded by the members in their back offices

The bank accounts of members maintained with the eight

clearing banks, viz., Bank of India, HDFC Bank Ltd., Global

Trust Bank Ltd., Standard Chartered Bank, Centurion Bank

Ltd., UTI Bank Ltd., ICICI Bank Ltd., and Indusind Bank Ltd.,

are directly debited through computerized posting for theirsettlement and margin obligations and credited with

receivables on accounts of pay-out dues and refund of

margins.

The securities, as per the Delivery Orders issued by the

Exchange, are required to be delivered by the members inthe Clearing House on the day designated for securities

pay-in, i.e., on T+3 day. In case of the physical securities,

the members have to deliver the securities in special

closed pouches (supplied by the Exchange) along with the

relevant details (distinctive numbers, scrip code, quantity,

and receiving member) on a floppy. The data submitted by


38/104

the members on floppies is matched against the master

file data on the Clearing House computer systems. If there

are no discrepancies, then a scroll number is generated by

the Clearing House and a scroll slip is issued. The

members can then submit the securities at the receiving

counter in the Clearing House

Auto D.O. facility:

Instead of issuing Delivery Out instructions for their

delivery obligations in a settlement /auction, a facility hasbeen made available to the members of automatically

generating Delivery-Out (D.O.) instructions on their behalf

from their CM Pool A/cs by the Clearing House w.e.f.,

August 10, 2000. This Auto D.O. facility is available for

CRS (Normal & Auction) and for trade-to-trade

settlements. This facility is, however, not available fordelivery of non-pari passu shares and shares having

multiple ISINs. The members wishing to avail of this facility

have to submit an authority letter to the Clearing House.

This Auto D.O facility is currently available only for

Clearing Member (CM) Pool accounts/Principal Accounts

maintained by the members with National SecuritiesDepository Ltd. (NSDL) and Central Depositories Services

Ltd. (CDSL)

Demat pay-in:

The members can effect demat pay-in either through

Central Depository Services (I) Ltd. (CDSL) or National


39/104


40/104

Members collect securities from the Clearing House on the

payout day and the accounts of the members having

payout are credited on Friday. This is referred to as

Payout. In case of the Rolling Settlements, pay-in and

payout of both funds and securities is on the same day, in

case of Weekly settlements, pay-in of funds and securities

is on Thursday and payout is on Friday.

The auction is conducted for those securities which

members fail to deliver/short deliver during the Pay-in. Incase the securities are not received in an auction, the

positions are closed out as per the closeout rate fixed by

the Exchange in accordance with the prescribed rules. The

close out rate is calculated as the highest rate of the scrip

recorded in the settlement in which the trade was

executed and in the subsequent settlement upto the dayprior to the day of auction, or 20% above the closing price

on the day prior to the day of auction, whichever is higher.

However, in case of close-out for shares under objection or

traded in "C" group, 10% instead of 20% above the closing

price on the day prior to the day of auction and the

highest price recorded in the settlement in which tradetook place upto a day prior to auction is considered.

The Exchange has strictly adhered to the settlement

schedules for various groups of securities and there has

been no case of clubbing of settlements or postponement

of pay-in and pay-out during the last six years.


41/104


42/104


43/104


44/104

However, in case of the close-out of the shares under

objection and shortages in "C" or "Z" group, 10% above

the closing prices of the scrips on the pay-out day of the

respective settlement are considered instead of 20%.

Further, if the auction price/close-out price of a scrip is

higher than the standard price of the scrip in the

settlement in which the transaction was done, the

difference is recovered from the seller who failed to

deliver the scrip. However, in case, auction/ close-outprice is lower than standard price, the difference is not

given to the seller but is credited by the Exchange to the

Customers Protection Fund. This is to ensure that the

seller does not benefit from his failure to meet his delivery

obligation. Further, if the offeror member fails to deliver

the shares offered in auction, then the transactions isclosed-out as per the normal procedure and the original

selling member pays the difference below the standard

rate and offer rate and the offeror member pays the

difference between the offer rate and close-out rate.

Self Auction

As has been discussed in the earlier paragraphs, the

Delivery and Receive Orders are issued to the members

after netting off their purchase and sale transactions in

scrips where netting of purchase and sale positions is

permitted. It is likely in some circumstances that a selling


45/104


46/104


47/104


48/104


49/104

Death Certificate (in cases where one or more of the

transferors are deceased) is missing.

A penalty at the rate of Rs.100/- per Delivery Order is

levied on the delivering member for delivering shares,

which are not in order. In the event a receiving member

misuses the facility of submitting shares under objection

without "Chukada", a penalty of Rs.500/- per case is

charged and the penalty of Rs.100/- per Delivery Order

levied on the delivering member is refunded to him bydebiting the receiving member's account

Close Out:

There are cases when no offer for particular scrip is

received in an auction or when members who offer the

scrips in auction, fail to deliver the same. In the formercase, the original seller member's account is debited and

the buyer member's account is credited at the closeout

rate. In the latter case, the offeror member's account is

debited and the buyer member's account is credited at the

close-out rate. The closeout rates for closing the positions

in different segments are as under:

For 'A' + 'B1' + 'B2' + 'Z', 'Rolling demat' and 'F'

group

The closeout rate is higher of the following rates:


50/104

The highest rate of the scrip from the first day (trading

day in case of Rolling demat segment) to the day prior

to the day on which the auction is conducted for the

respective settlement.

20% above the closing rate as on the day prior to the

day of auction of the respective settlement.

For 'C' group segment

The close-out rate is higher of the following rates :

The highest rate of the scrip from the first day to the

day prior to the day of auction of 'A', 'B1', 'B2, and 'Z'

group segment of the respective settlements; or


day of auction of 'A', 'B1', 'B2, and 'Z' group; or

Transaction price.

In the 'C' group, i.e., Odd Lot Segment, no auction session

is conducted. The shortages are directly closed out.


51/104


52/104

The highest rate of the scrip from the first day to the

day prior to the day of auction of 'A', 'B1', 'B2, and 'Z'

group segment of the respective settlements; or


day of auction of 'A', 'B1', 'B2, and 'Z' group; or

Transaction price.

In the 'C' group, i.e., Odd Lot Segment, no auction session

is conducted. The shortages are directly closed out.

BASKET TRADING SYSTEM

The Exchange has commenced trading in the Derivatives

Segment with effect from June 9, 2000 to, enable the

investors to hedge their risks. Initially, the facility of

trading in the Derivatives Segment has been confined to

Index Futures. Subsequently, the Exchange has since

introduced the index options and options & futures in

select individual stocks. The investors in cash market had

felt a need to limit their risk exposure in the market to

movement in Sensex.

With a view to provide investors with this facility of

creating Sensex linked portfolios and also to create a

linkage of market prices of the underlying securities of

Sensex in the Cash Segment and Futures on Sensex, the

Exchange has provided the facility of Basket Trading

System on BOLT. In Basket Trading System, the investors


53/104


54/104

Sensex basket is arrived at by the system by multiplying

Rs.50 to prevailing Sensex.

SETTLEMENT SYSTEMSecurities traded on BSE are classified into three groups,

namely, specified shares or 'A' group and non-specified

securities that are sub-divided into 'B1' and 'B2' groups.

Presently, equity shares of thirty-two companies are

classified as specified shares. These companies typically

have a large capital base with widespread shareholding, asteady dividend, good growth record and a large volume

of business in the secondary market. Contracts in this

group are allowed to be carried over to subsequent

settlements upto a maximum permissible period of 75

days.

495 relatively liquid securities are placed in a category

called 'B1' group. The remaining securities-about 5800 as

on May 31, 1996 are placed in the 'B2' group. All newly

listed securities are placed in the 'B2' group.

Settlement of transactions is done on an 'Account Period'basis. The period is a calendar week in the case of 'A' and

'B1' groups and 14 calendar days in the case of 'B2' group

During an account period, buy or sell positions in a

particular security can be either squared up by entering

into contra transactions or can be further accumulated by

entering into more buy or sell transactions.


55/104

Clearing System

The Clearing House of the Exchange handles the share

and the money parts of the settlement process in the caseof 'A' and 'B1' groups. The Clearing House handles only

the money part of 'B2' group while securities are

physically exchanged between the brokers.

Opportunities available for foreign investors

1. Direct investment:

Foreign Companies are now permitted to have a

majority stake in their Indian affiliates except in a few


56/104


57/104

III. A registered FII is required to buy or sell only for

delivery. It should not offset a deal. It is also not

allowed to sell short.

3. Investment in Euro Issues/Mutual Funds Floated

Overseas:

Foreign investors can invest in Euro issues of Indian

companies and in India-specific funds floated abroad.

4. Broking Business: Foreign brokers upon registration with the SEBI are now

allowed to route the business of registered FIIs.

Guideline for the purpose have been issued by SEBI.

However, foreign brokers at present are not allowed

membership in India Stock Exchanges.

5. Asset Management Companies/Merchant

Banking:

Foreign Participation in Asset Management Companies

and Merchant Banking Companies is permitted.

TRANSFER OF OWNERSHIP

Transfer of ownership of securities in effected through a

date stamped transfer-deed, which is signed, by the buyer

and the seller. The duly executed transfer-deed along with

the share certificate has to be lodged with the company

for change in the ownership. A nominal duty becomes

payable in the form of stamps to be affixed on the


58/104

transfer-deeds. Transfer-deeds remain valid for twelve

months or the next book closure following the stamped

date whichever occurs later.

SAFEGUARDS

1. Margins are collected from the brokers on buying and

selling positions at the end of the day. The total

outstanding position is further subject to capital

adequacy norms laid down from time to time.2. A comprehensive insurance cover for the Exchange

and the members is about to be put in place.

3. Guaranteeing trades is the cornerstone of a mature

clearing and settlement process. BSE is in the

process of establishing a Clearing Corporation that

will guarantee trades.4. Companies are required to publish half-yearly

unaudited results and other price sensitive

information. This imparts greater transparency to the

stock market operations.

5. Insider Trading Regulations have been laid down and

a 'Take-Over' code has been created.

ARBITRATION MACHINERY

There exists three level arbitration machinery. The first

two levels, which are adjudicated by member brokers,

comprise of a two-member bench and a full bench that is

to comprise of at least sixteen members respectively. The


59/104

highest arbitrator in the Exchange is the Governing Board.

Disputes unresolved in the Exchange are taken to the

Court of Law.

CUSTOMER PROTECTION FUND

The objective of this fund is to provide insurance to

investors in case of default by a member. The investor is

indemnified from default to the extent of Rs.1, 00,000.

The corpus of the fund is created by depositing 2.5% of the listing fees and a levy on turnover at the rate or Re.1

for Rs. 1 million of turnover. It is further augmented by

50% of the interest accrued on 1% of the issue amount

which is deposited by companies at the time of their

public and rights issues for a three month period as a

safeguard against non-refund of excess subscription.

GRIEVANCE REDRESSAL

The Investor's Services Cell redresses investors'

grievances against listed companies and stockbrokers.

However, the Exchange does not have power to take

penal action against listed companies, except delisting for

specified periods.

DISCIPLINARY ACTION


60/104

The Exchange has an eight member Disciplinary Action

Committee (DAC) which decides on punitive action in

disciplinary cases referred to it by the Surveillance and

inspection departments of the Exchange Administration.

INDICES

The Exchange compiles four indices, which are based on

market capitalization. The first index to be compiled wasthe BSE Sensitive Index with 1978-79 as the base year. It

comprises of equity shares of 30 companies from both

specified and non-specified securities groups. The

companies have been selected on the basis of market

activity. Subsequently, a more broad based index, BSE

National Index with 1983-84 as base year, was compiled. This index is made up of 100 scrips, 98 of which are

quoted on Bombay. This index also includes prices on the

other major stock exchanges of Delhi, Calcutta,

Ahmedabad and Madras. If scrip is actively quoted on

more than one Exchange the average price of the scrip is

used in the compilation of the index.

It was felt that the sensitive index-the most popular

indicator of market movement-had become oversensitive

to a handful of scrips. With divestment of Public Sector

Unit (PSU) equity by government and a sharp increase in

the number of companies listed over the last few years, itwas felt that a new index, which is more representative of


61/104

the recent changes and is more balanced is necessary.

The BSE-200, which was introduced in May 1994, consists

of equity shares of 200 companies, which have been

selected on the basis of market capitalization, volume of

turnover and strength of the companies' fundamentals.

1989-90 has been chosen as the base year for BSE-200.

As the presence of the foreign investors grew, a need was

felt to express the index values by taking into account the

Rupee-Dollar conversion rate. Consequently, dividing thecurrent Rupee market value by Rupee-Dollar modifies the

BSE-200 conversion rate in the base year. This index,

which indicates the movement of the market in dollar

values, is called the Dollex.

DISCLOSURE & LISTING NORMS

Companies who wish to raise money from capital market

follow guidelines relating to disclosure, laid down by the

Securities and Exchange Board of India. Some of the

disclosure norms are:

Details of other income if it constitutes more than tenpercent of total income.

All adverse event affecting the operations of the

company. Any change in key managerial personnel.

Risk factors specific to the project and those which

are external to the company.


62/104

The listing requirements with the Exchange call for further

disclosure by companies to promote public confidence.

Important disclosures are: The company is required to furnish unaudited half-

yearly financial results in the prescribed Performa. The company must explain to the Stock Exchange

any large variation between audited and unaudited

results in respect of any item. When any person or an institution acquires or agrees

to acquire any security of a company which would

result in his holding five percent or more of the

voting capital of the company, including the existing

holding the Exchange must be notified within two

days of such acquisition by the company or by

authorized intermediary or by the acquirer. Any take-over offer made either voluntarily or

compulsorily to a company requires a public

announcement by both the offeror and the offeree

company.

Computerized Trading

BSE computerized its trading and settlement activities by

following a three-phased approach.

Phase I: The primary objective of this phase was the real

time dissemination of price data through the Display


63/104

Information Driver System (DIDS). DIDS was

commissioned in November 1992 to disseminate bids,

offers, actual rates of transactions and indices on a real

time basis.

Phase II: In 1994, settlement related daily transactions

inputs and outputs were uploaded and downloaded from

the TWS in the brokers offices.

Phase III: Commissioned on March 14, 1995. Although,screen based trading started with 818 scrips, by the 70th

day of its commissioning, all scrips-exceeding 5000 had

been put on the BOLT system. The BOLT system was

commissioned with the Himalya K 10,000 central trading

computer hardware. Since then the hardware has been

upgraded to the Himalya K 20,000 system. The systemprovides for a response time of two seconds and can

handle more than two hundred thousand trades in a day.

Stock Market Indicators1991-

92(Apr.Mar)

1992-

93(Apr.Mar)

1993-

94(Apr.Mar)

1994-

95(Apr.Mar)

1995-96(Apr.Ma

r)

No. of ListedCompanies 2061 2861 3585 4702 5603

Market Capitalization(In Rs.Billion) 3059.87 1881.46 3680.71 4354.81 5264.76

(In US $Billion) 97.13 59.72 116.85 138.37 153.27

Annual Turnover


64/104

(In Rs.Billion) 717.77 456.96 836.29 677.49 500.64(In US $Billion) 22.78 14.50 26.55 21.51 14.57

Velocity 0.23 0.24 0.24 0.16 0.10Average Daily Turnover

(In Rs.Billion) 3.32 2.38 3.84 1.78 2.16(In US $Billion) 0.10 0.07 0.12 0.06 0.06

No. of SharesTraded

(In MillionNos.)

6,35,5153,50,3137,42,792 1,07,24.8 7,71,850

AverageNumber of Daily Deals

75,000 65,535 63,786 85,010 73,855

BSE SensitiveIndex

(Year End)4285.00 2280.52 3778.99 3260.95 3366.61

BSE NationalIndex

(Year End)1967.71 1021.40 1829.53 1605.57 1549.25

BSE 2000(Year End) 585.19 234.35 450.07 365.97 345.40

Dollex (YearEnd) 261.25 124.89 238.86 194.67 168.54

No. of Registered

Flls- - 145 308 366

Fll Net investment(In Rs. Billion) - - 29.85 21.24 31.63

(In US $Billion) - - 0.95 0.67 0.92

No. of Members

(Year End)558 558 628 636 641

No. of CorporateMembers

(Year End)

4 4 4 26 63


65/104

Future Developments

In 1995, the President of India promulgated an Ordinance,

which allowed for establishment of depositories.

BSE in collaboration with Bank of India (BOI) will shortly

establish a depository. BSE has applied for permission

from SEBI to expand BOLT to other centres. Expansion of

BOLT would bring more investors into the ambit of the

capital market and consequently add depth to it.


66/104

INTRODUCTION

The National Stock Exchange (NSE) is India's leading stock

exchange covering around 400 cities and towns all over

India. NSE introduced for the first time in India, fully

automated screen based trading. It provides a modern,

fully computerized trading system designed to offer

investors across the length and breadth of the country a

safe and easy way to invest or liquidate investments in

securities.

Sponsored by the industrial development bank of India,

the NSE has been co-sponsored by other development/

public finance institutions, LIC, GIC, banks and other

financial institutions such as SBI Capital Market,

Stockholding corporation, Infrastructure leasing andfinance and so on. India has had a history of stock

exchanges limited in their operating jurisdiction to the

cities in which they were set up.

NSE started equity trading on November 3, 1994 and

within a short span of 1 year became the largest exchangein India in terms of volumes transacted. Trading volumes

in the equity segment have grown rapidly with average

daily turnover increasing from Rs.7 crores in November

1994 to Rs.6797 crores in February 2001 with an average

of 9.6 lakh trades on a daily basis. During the year 2000-

2001, NSE reported a turnover of Rs.13, 39,510 crores in


67/104

the equities segment accounting for 45% of the total

market.

The NSE represented an attempt to overcome the

fragmentation of regional markets by providing a screen-

based system, which transcends geographical barriers.

Having operationalised both the debt and equity markets,

the NSE is planning for a derivative market, which will

provide futures and options in equity. Its main objectives

has been to set up comprehensive facilities for the entirerange of securities under a single umbrella, namely,

To set up a nation wide trading facility for equities,

debt instruments and

hybrids;

To ensure equal access to investors across the

country through an appropriatecommunication network;

To provide a fair, efficient and transparent securities

market to investors using the electronic

trading system;

To ensure shorter settlement cycles and book entry

settlement systems; and

To meet the current international standards

prevalent in the securities

Industry/markets.

Locations


68/104

One of the objectives of NSE was to provide a nationwide

trading facility and to enable investors spread all over the

country to have an equal access to NSE. NSE uses

sophisticated telecommunication technology through

which members can trade remotely from their offices

located in any part of the country. NSE trading terminals

are present in around 400 cities and towns all over India.

Listing

The prime objective of admission to dealings on the

Exchange is to provide liquidity and marketability to

securities as also to provide a mechanism for effective

management of trading.

Securities listed on the Exchange are required to fulfill thelisting eligibility criteria. Various types of securities of a

company are traded under a unique symbol and different

series. This section provides a direct link to the web site of

companies traded on the Exchange.

Constitution


69/104


70/104

Pursuant to SEBI guidelines, NSE introduced a new market

called Limited Physical Market to provide a facility to small

investors to trade and settle physical shares in those

securities where compulsory dematerialized trading and

settlement is enforced by SEBI. In this segment quantities

not exceeding 500 shares of each security held in the

name of the investor can be traded.

3. Institutional Segment

Trading in this market segment is available for

institutional investors only. In order to ensure that the

overall FII ceiling limits are not violated, trading members

are allowed to enter sell orders in this market segment

only for their FII clients. However, members can enter buy

orders on behalf of FII/FI clients. The settlement of

transactions in this segment is in demat mode only.

4. Trade for Trade Segment

Trading in this segment is available only for those

securities, which have not established connectivity with

both the depositories as per SEBI directive. The list of

these securities is notified by SEBI from time to time.

5. Trading System


71/104

NSE operates on the 'National Exchange for Automated

Trading' (NEAT) system, a fully automated screen based

trading system, which adopts the principle of an order

driven market. NSE consciously opted in favour of an order

driven system as opposed to a quote driven system. This

has helped reduce jobbing spreads not only on NSE but in

other exchanges as well, thus reducing transaction costs.

Till the advent of NSE, an investor wanting to transact in a

security not traded on the nearest exchange had to routeorders through a series of correspondent brokers to the

appropriate exchange. This resulted in a great deal of

uncertainty and high transaction costs. NSE has made it

possible for an investor to access the same market and

order book, irrespective of location, at the same price and

at the same cost.Market Types

The NEAT system in NSE has four types of market. They

are:

Normal Market

All orders which are of regular lot size or multiples thereof

are traded in the Normal Market. For shares, which are

traded in the compulsory dematerialised mode the market

lot of these shares, is one. Normal market consists of

various book types wherein orders are segregated as

Regular lot orders, Special Term orders, Negotiated Trade


72/104

Orders and Stop Loss orders depending on their order

attributes.

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.

These orders do not have any special terms attributes

attached to them. In an odd-lot market, 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.

Spot Market

Spot orders are similar to the normal market orders

except that spot orders have different settlement periods

vis--vis normal market. These orders do not have any

special terms attributes attached to them. Currently theSpot Market is being used for the Automated Lending &

Borrowing Mechanism (ALBM) session.

Auction Market

In the Auction Market, the Exchange on behalf of trading

members for settlement related reasons initiatesauctions.


73/104

There are 3 participants in this market.

Initiator

The party who initiates the auction process is

called an initiator.

Competitor

The party who enters orders on the same side as

of the initiator is called a Competitor.

Solicitor

The party who enters orders on the opposite side

as of the initiator is called a Solicitor.

Order Books

The NSE trading system provides complete flexibility to

members in the kinds of orders that can be placed by

them. Orders are first numbered and time-stamped on

receipt and then immediately processed for potential

match. Every order has a distinctive order number and a

unique time stamp on it. If a match is not found, then the

orders are stored in different 'books'. Orders are stored in

price-time priority in various books in the following

sequence:


74/104


75/104

3. Negotiated Trade Book

The Negotiated Trade book contains all negotiated

order entries captured by the system before they have

been matched against their counterparty trade entries.

These entries are matched with identical counterparty

entries only. It is to be noted that these entries contain

a counter party code in addition to other order details.

4. Stop-Loss Book Stop Loss orders are stored in this book till the trigger

price specified in the order is reached or surpassed.

When the trigger price is reached or surpassed, the

order is released in the Regular lot book.

The stop loss condition is met under the followingcircumstances:

Sell order - A sell order in the Stop Loss book gets

triggered when the last traded price in the normal market

reaches or falls below the trigger price of the order.

Buy order - A buy order in the Stop Loss book getstriggered when the last traded price in the normal market

reaches or exceeds the trigger price of the order.

5. Odd Lot Book

The Odd lot book contains all odd lot orders (orders

with quantity less than marketable lot) in the system.


76/104

The system attempts to match an active odd lot order

against passive orders in the book. Currently, pursuant

to a SEBI directive the Odd Lot Market is being used

for orders which has a quantity less than or equal to 500

(Qty more than the market lot) for trading. This is

referred as the Limited Physical Market (LPM).

6. Spot Book

The Spot lot book contains all spot orders (orders having

only the settlement period different) in the system. Thesystem attempts to match an active spot lot order

against the passive orders in the book. Currently the

Spot Market book type is being used for conducting the

Automated Lending & Borrowing Mechanism (ALBM)

session.

7. Auction Book

This book contains orders that are entered for all

auctions. The matching process for auction orders in

this book is initiated only at the end of the solicitor

period.

Order Matching Rules

The best buy order is matched with the best sell order. An

order may match partially with another order resulting in


77/104

multiple trades. For order matching, the best buy order is

the one with the highest price and the best sell order is

the one with the lowest price. This is because the system

views all buy orders available from the point of view of a

seller and all sell orders from the point of view of the

buyers in the market. So, of all buy orders available in the

market at any point of time, a seller would obviously like

to sell at the highest possible buy price that is offered.

Hence, the best buy order is the order with the highest

price and the best sell order is the order with the lowestprice.

Members can proactively enter orders in the system,

which will be displayed in the system till the full quantity is

matched by one or more of counter-orders and result into

trade(s) or is cancelled by the member. Alternatively,members may be reactive and put in orders that match

with existing orders in the system. Orders lying

unmatched in the system are 'passive' orders and orders

that come in to match the existing orders are called

'active' orders. Orders are always matched at the passive

order price. This ensures that the earlier orders getpriority over the orders that come in later.

Order Conditions

A Trading Member can enter various types of orders

depending upon his/her requirements. These conditions


78/104

are broadly classified into three categories: time related

conditions, price-related conditions and quantity related

conditions. For example

Time Conditions

DAY - A Day order, as the name suggests, is an order

which is valid for the day on which it is entered. If the

order is not matched during the day, the order gets

cancelled automatically at the end of the trading day.

GTC - A Good Till Cancelled (GTC) order is an order

that remains in the system until the Trading Member

cancels it. It will therefore be able to span trading

days if it does not get matched. The Exchange

notifies the maximum number of days a GTC order

can remain in the system from time to time.

GTD - A Good Till Days/Date (GTD) order allows the

Trading Member to specify the days/date up to which

the order should stay in the system. At the end of

this period the order will get flushed from the system.

Each day/date counted is a calendar day andinclusive of holidays. The days/date counted are

inclusive of the day/date on which the order is

placed. The Exchange notifies the maximum number

of days a GTD order can remain in the system from

time to time.


79/104

IOC - An Immediate or Cancel (IOC) order allows a

Trading Member to buy or sell a security as soon as

the order is released into the market, failing which

the order will be removed from the market. Partial

match is possible for the order, and the unmatched

portion of the order is cancelled immediately.

AON - All or None orders allow a Trading Member to

impose the condition that only the full order should

be matched against. This may be by way of multiple

trades. If the full order is not matched it will stay in

the books till matched or cancelled.

Note: Currently, AON and MF orders are not available on

the system as per SEBI directives.

Price Conditions

Limit Price/Order

An order, which allows the price to be specified while

entering the order into the system.


80/104

Market Price/Order

An order to buy or sell securities at the best price

obtainable at the time of entering the order.

Stop Loss (SL) Price/Order

The one which allows the Trading Member to place an

order which gets activated only when the market price of

the relevant security reaches or crosses a threshold price.

Until then the order does not enter the market.

Sell order

A sell order in the Stop Loss book gets triggered when the

last traded price in the normal market reaches or falls

below the trigger price of the order.

Buy orderA buy order in the Stop Loss book gets triggered when the

last traded price in the normal market reaches or exceeds

the trigger price of the order.

e.g. If for stop loss buy order, the trigger is 93.00, the limit

price is 95.00 and the market (last traded) price is 90.00,then this order is released into the system once the

market price reaches or exceeds 93.00. This order is

added to the regular lot book with time of triggering as the

time stamp, as a limit order of 95.00

Quantity Conditions


81/104

Disclosed Quantity (DQ)- An order with a DQ condition

allows the Trading Member to disclose only a part of the

order quantity to the market. For example, an order of

1000 with a disclosed quantity condition of 200 will mean

that 200 is displayed to the market at a time. After this is

traded, another 200 is automatically released and so on

till the full order is executed. The Exchange may set a

minimum disclosed quantity criteria from time to time.

MF - Minimum Fill (MF) orders allow the Trading Member to

specify the minimum quantity by which an order should be

filled. For example, an order of 1000 units with minimum

fill 200 will require that each trade be for at least 200

units. In other words there will be a maximum of 5 trades

of 200 each or a single trade of 1000. The Exchange maylay down norms of MF from time to time.

Trading Workstation

The trader workstation is the terminal from which the

member accesses the trading system. Each trader has aunique identification by way of Trading Member ID and

User ID through which he is able to log on to the system

for trading or inquiry purposes. A member can have

several user IDs allotted to him by which he can have

more than one employee using the system concurrently.


82/104


83/104

The ticker displays information about a trade as and when

it takes place. The user has the option to set-up the

securities, which appear in the ticker.

Market Watch Window

The Market Watch window is the main area of focus for a

Trading Member. The purpose of Market Watch is to view

market information of pre-selected securities, which are of interest to the Trading Member.

To monitor various securities, the trading member can set

them up by typing the Security Descriptor consisting of a

Symbol field and a Series field. Invoking the Security List

and selecting the securities from the window can also setup securities. The Symbol field incorporates the Company

name and the Series field captures the

segment/instrument type. A third field indicates the

market type.

For each security in the Market Watch window, marketinformation is dynamically updated on a real time basis.

The market information displayed is for the current best

price orders available in the regular lot book. For each

security, the corporate action indicator (e.g., Ex or cum

dividend, interest, rights etc.), the total buy order quantity

for the best buy price, best sell price, total sell order


84/104

quantity for the best sell price, the Last Traded Price (LTP),

the last traded price change indicator ('+' if last traded

price is better than the previous last traded price and '-' if

it is worse) and the no delivery indicators are displayed. If

the security is suspended, "SUSPENDED" appears in front

of the security.

On line index and Index Inquiry

With every trade in a security participating in Index, theuser has the information on the current value of the Nifty.

This value is displayed at the extreme right hand corner of

the ticker window.

Index Inquiry gives information on Close, Open, High, Low

and current index values at the time of invoking thisinquiry screen.

Inquiry Window

In this window, the inquiries such as Market by Order,

Market by Price, Previous Trades, Outstanding Orders,Activity Log, Order Status and Market Inquiry can be

viewed.

Market By Order (MBO)


85/104

The purpose of Market by Order is to enable the user to

view outstanding orders in the trading books in the order

of price/time priority. The information is displayed for each

order. Stop Loss orders, which are not triggered will not be

displayed on the window. Buy orders are displayed on the

left side of the window and Sell orders on the right side.

The orders are presented in a price/time priority with the

"best priced" order at the top.

Market by Price (MBP)

The purpose of Market By Price is to enable the Trading

Member to view aggregate orders waiting in the book at

given prices.

Previous Trades (PT)

The purpose of this window is to provide information to

users for their own trade.

Outstanding Orders (OO)

The purpose of Outstanding Orders is to enable a Trading

Member to view his/her own outstanding buy or sell orders

for a security. An outstanding order will be an order that

was entered by the user, but is not yet completely traded

or cancelled.


86/104

Activity Log (AL)

The Activity Log shows the activities, which have been

performed on any order of the Trading Member such as

whether, the order has been traded against fully or

partially, it has been modified or has been cancelled. It

displays information only of those orders in which some

activity has taken place. It does not display orders, which

have entered the books but have not been matched (fully

or partially) or modified or cancelled.

Order Status (OS)

Order Status enables the user to look into the status of a

specific order. Current status of the order and other order

details are displayed. In case the order is traded, the tradedetails are also displayed.

Market Inquiry (MI)

Market Inquiry enables the user to view the market

statistics like Open, High, Low, Previous close, Last traded

price change indicator, Last traded quantity, date and

time etc. A user may find inquiry screens like Market

Movement, Most Active Securities and Net Position useful.

These are available in the supplementary menu.

Market Movement (MM)


87/104

The Market Movement screen provides information to the

user regarding the movement of a security for the current

day. It gives details of the movement of the scrip for a

time interval. The details include total buy and sell order

quantity value, Open, High, Low, Last traded price etc.

Most Active Securities

This screen gives a list of the securities with the highest

traded value during the day and the quantity traded foreach of them.

Net Position

This functionality enables the user to interactively view hisnet position for all securities in which he has traded.

Snap Quote

The Snap Quote feature allows a Trading Member to get

instantaneous market information on any desired security. This is normally used for securities which are not already

on display in the Market Watch window. The information

presented is the same as that of Market Watch window.

Order/Trade Window


88/104


89/104

On line back up

An on line back up facility is provided which the user can

invoke to take a back up of all order and trade related

information. There is an option to copy the file to any drive

of the computer or on a floppy diskette. Trading members

find this convenient in their back office work.

Off Line Order Entry

A member is able to make an order entry in the batch

mode.

Computer-to-Computer Link (CTCL) Facility

NSE offers a facility to its trading members by which

members can use their own trading front-end software in

order to trade on the NSE trading system. This Computer-

to-Computer Link (CTCL) facility is available only to trading

members of NSE.

Through CTCL facility Trading Members can use their own

software running on any suitable hardware/software

platform of their choice. This software would be a

replacement of the NEAT front-end software that is

currently used by members to trade on the NSE trading

system. Members can use software customised to meet

their specialized needs like provision of on-line trade


90/104


91/104

undertakes settlement of transactions on other stock

exchanges like, the Over the Counter Exchange of India.

NSCCL assumes the counter-party risk of each member

and guarantees settlement through a fine-tuned risk

management system and an innovative method of on-line

position monitoring. It operates a well-defined settlement

cycle and there are no deviations or deferments from this

cycle. It aggregates trades over a trading period, nets the

positions to determine the liabilities of members and

ensures movement of funds and securities to meetrespective liabilities. It provides a facility for multiple

settlement mechanisms including, account period

settlement for dealings in physical securities and

dematerialized securities, rolling settlement (T+5 basis) in

dematerialized segment etc.

NSCCL has empanelled 9 clearing banks to provide

banking services to trading members and has established

connectivity with both the depositories for electronic

settlement of securities.

BADLA TRADING

Badla is a complex system that contains many a pitfall for

the uninitiated and the unwary. Investors need to be

aware of the problems, especially when brokers on BSE


92/104

and other regional stock exchanges are marketing vyaj

badla schemes to their clients aggressively.

Before an investor start believing in the stories of

superlative returns (in excess of 20 per cent), coupled with

liquidity, safety and flexibility, it is imperative that one

takes a hard, rational look at the entire mechanism. This is

so because financing badla is a definite no-no for the first-

time investor in the stock market and also for those who

don't have the time to constantly monitor the status of his/her investments and fluctuations in the market returns

Vyaj Badla

In the vyaj badla system, there was a very high chance

that an investor may end up with an average annual

return of 14-18 per cent or sometimes even higher. But

having said that, unfortunately, the returns were not

guaranteed. This rosy picture could well be a reality during

a bull run, but when the market was under a bear hug,

returns could diminish to just around 6-8 per cent a year.

Comparing it with a steady 12 per cent annual return

offered by a bank fixed deposit or any AAA rated corporate

bandit seemed that The high-risk and uncertain return of

vyaj badla would start looking like a bad investment

option.


93/104

And then the taxman cometh! Vyaj badla transactions

began to be treated as purchase and sale of shares, thus

getting subjected to capital gains tax of 30 per cent. Thus,

an investors final returns get lopped off to that extent.

Although nay Sayers might feel that vyaj badla provides

an investor with an opportunity to maximize his earnings

in a bull market, the fact remains that it is a good option

for the experienced investor. Else, the nerve-wracking

tension that accompanies stock market fluctuations may

well take its toll.

How did the Badla function?

Assume that there had been 12 trades of 100 shares each

in "ABC" stock, and there are 12 separate buyers and

sellers respectively. Among the buyers, while six wantedto carry forward their positions, six want to take delivery.

Of the sellers, eight wished to deliver the shares while four

were keen on carrying their positions forward. Now six

buyers made the payment for their purchases, while eight

sellers effect delivery. Six buyers and six sellers got

squared off. Four "buy" carry-forward positions getmatched against four "sell" carry-forward positions.

To ensure payment to the remaining two sellers for their

200 shares, vyaj badla financiers came in. This financier

charged interest (badla) for the money paid on behalf of

the two buyers for them. The demand and supply of funds


94/104


95/104

constantly keep flashing the best badla rate and the best

annual yield for each stock on offer for a particular

quantity. A constant fluctuation in these values during the

two-and-a-half hour session is due to the constant change

in demand and supply, and also market perception. The

broker would give the financier a badla bill or informal

contract note, which would have two entries. One would

show a purchase of 100 shares at Rs 69 per share, while

the other would show a sale of 100 shares at Rs 69.26 per

share. The difference will be the financiers earning for thatweek. With the next trading cycle ending, the financier

can either receive the difference or roll over his/her

money to a new badla transaction.

Who can participate?

Not all brokers can participate in the badla process.

Memberships on BSE are split between type-I and type-II

brokers. Only the former can carry out badla trades, for

they maintain higher margins with the exchange. Hence, if

you are keen on becoming a vyaj badla financier, you

should approach the type-I broker.

Most brokers don't accept anything less than Rs 1 lakh per

client for badla financing. And the stock selection too is at

their discretion. But it would be prudent for you to know

the basis of allocation of stocks to you, as you would be

one among a lot of clients whose money has been


96/104

collectively invested in vyaj badla. Badla rates vary

between stocks, depending upon their demand and

supply. These rates fluctuate considerably throughout the

session.

Ideally, brokers using the discretionary allocation of stocks

to the badla account should pay a weighted average

return to each client. This should be reflected in the badla

bills. For getting the weighted average return on badla

finance, it is advisable to look for brokers who haveautomated this process.

As in any other market transaction, one cannot avoid

brokerage in a vyaj badla transaction too. Brokerage for

such deals could range between 1-2.5 per cent, trimming

down your annual yield further. It is advisable to enter intoa firm brokerage percentage prior to the commencement

of the relationship.

Are investors safe?

What is the investors safeguard in times of default? If the

forward buyer defaults, he got the shares held in theexchange's clearinghouse against his brokers name, on

which he had a lien through his Badla bill. But his risk

erosioned in the value of the share during the days that it

takes to release the shares.


97/104

In the recent history of BSE, there have been instances of

brokers (having large carry-forward positions in highly

speculative stocks) defaulting. Although these shares were

enjoying very high badla rates at the time of the default,

the prices had dipped sharply by the time the financiers

got their shares.

If the broker defaults, the financier is in a larger mess.

Apart from the large institutional brokers, most brokers on

BSE have a net worth of Rs 1-2 crore. Badla positionstaken by them sometimes go up to 15-20 times their net

worth. Even a 10 per cent downward shift in their position

would wipe out the broker's entire net worth. And then

you could bid goodbye to your money too. The BSE's

Trade Guarantee Fund could be of some succour and

solace in these situations, but just that.

Failure to cash in on your interest gain at the end of the

trading cycle gives the confidence to your broker to

automatically roll over your investment to the next cycle.

Documents

Working of Stock Exchanges