Three most noticeable changes in the Indian securities market in

the last ten years:

1) Dematerialisation
2) Introduction of screen based trading
3) Shortening of trading and settlement cycles.

Presently in India, stock exchanges follow T+2 days settlement

cycle. Under this system, trading happens on every business
day, excluding Saturday, Sunday and exchange notified
holidays.
Trading system on NSE

The NSE provides a facility for screen based trading with order matching
facility.
 The members are connected from their respective offices at dispersed locations
to the main system at the NSE premises through a high- speed efficient satellite
telecommunication network.
The trading system is an order driven, automated order matching system which
does not reveal the identity of parties to an order or a trade.
Orders are matched automatically by the computer keeping the system
transparent, objective and fair.
Where an order does not find a match it remains in the system and is displayed
to the whole market, till a fresh order which matches, comes in or the earlier order
is cancelled or modified.





Ôll stock exchanges follow screen-based trading system.

e.g Trading system at NSE known as the National Exchange for Ôutomated
Trading (NEÔT) 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 and consequently narrows the spreads.
Ô single consolidated order book for each stock displays, on a real time
basis, buy and sell orders originating from all over the country.
The book stores only limit orders, which are orders to buy or sell shares at a
stated quantity and stated price.
The limit order is executed only if the price quantity conditions match.
Thus, the system provides an open electronic consolidated limit order book.
Orders are sorted and match automatically by the computer keeping the
system transparent, objective and fair. The trading system also provides
complete market information on-line, which is updated on real time basis.
 arder Conditions
Ô Trading Member can enter various types of orders depending upon
his/her requirements. These conditions are broadly classified into
three categories:

 time related conditions,

 price-related conditions and
 quantity related conditions.
Time Conditions

DÔ - Ô Day order, 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 - Ô Good Till Cancelled (GTC) order is an order that remains in the system until it is
cancelled by the Trading Member. It will therefore be able to span trading days if it does
not get matched. The maximum number of days a GTC order can remain in the system is
notified by the Exchange from time to time.

GTD - Ô 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. Ôt the end of this period the
order will get flushed from the system

IOC - Ôn 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.
árice Conditions

uimit Price/Order ± Ôn order that allows the price to be specified while entering the order
into the system.

Market Price/Order ± Ôn order to buy or sell securities at the best price obtainable at the
time of entering the order.

Stop uoss (Su) Price/Order ± The one that 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.

Ô sell order in the Stop uoss book gets triggered when the last traded price in the normal
market reaches or falls below the trigger price of the order. Ô buy order in the Stop uoss
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
è antity Conditions

Disclosed Quantity (DQ)- Ôn 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. Ôfter this is traded, another 200 is automatically released and so on till the full order
is executed.

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.

ÔON - Ôll 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.

Trader Workstation: The trader workstation is the terminal from which the member
accesses the trading system. Each trader has a unique 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. Ô member can have several user IDs allotted to him by which he can
have more than one employee using the system concurrently.
Sec rities Available for Trading

The Capital Market (Equities) segment of NSE facilitates trading in the following
instruments:

 Shares
 Debentures & Bonds
 Units of Mutual Funds

[Shares can be bought and sold thro gh a broker on telephone.

[Brokers identify their clients by a niq e code assigned to a client.
[Ôpart from the purchase price of security, a client is also supposed to pay
brokerage, stamp d ty and sec rities transaction tax.
½arket Segments

The Exchange operates the following sub-segments in the

Equities segment

rolling Settlement

uimited Physical Market

Institutional Segment

Trade for Trade Segment

The NEÔT system has four types of market. They are:

Normal Market
Ôll orders which are of regular lot size or multiples thereof are traded in the
Normal Market.

Odd uot Market

Ôll orders whose order size is less than the regular lot size are traded in the
odd-lot market. 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..

Ôuction Market
In the Ôuction Market, auctions are initiated by the Exchange on behalf of
trading members for settlement related reasons. There are 3 participants in this
market-Initiator, Competitor & Solicitor

Spot orders are similar to the normal market orders except that spot orders have
different settlement periods vis-à-vis normal market. These orders do not have
any special terms attributes attached to them..
Trading System - 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:
Best Price
Within Price, by time priority.

Price priority means that if two orders are entered into the system, the order
having the best price gets the higher priority. Time priority means if two orders
having the same price are entered, the order that is entered first gets the higher
priority.
The Equities segment has following types of books:

regular uot Book

The regular uot Book contains all regular lot orders that have none of the special
attributes attached to them.

Special Terms Book

The Special Terms book contains all orders that have either of the following terms
attached:Ôll or None (ÔON), Minimum Fill (MF)

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 counterparty code in addition to other order details.
Stop-uoss Book
Stop uoss 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

Odd uot Book

The Odd lot book contains all odd lot orders (orders with quantity less than
marketable lot) in the system. The system attempts to match an active odd lot
order against passive orders in the book..

Spot Book
The Spot lot book contains all spot orders (orders having only the settlement
period different) in the system. The system attempts to match an active spot lot
order against the passive orders in the book. .

Ôuction 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.
Trading System - arder ½atching R le

[The best buy order is matched with the best sell order.
[Ôn order may match partially with another order resulting in 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.
[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.

[Ôlternatively, 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 get priority over the orders that come in later
[Trading of securities happen on the first day while settlement of the same
happens two days after.
[This means that a security bought on Monday will be received by the client
earliest on Wednesday which is called pay out day by the exchange.
[However there is provision which allows a broker to transfer securities till 24
hours after pay out receipt. Hence the broker may transfer shares latest by
Thursday for a security bought on Monday. Ôny transfer after Thursday would
invite penalty for the broker.

[If a person has bought security then he is supposed to pay money to the broker
before pay in deadline which is two days after trading day but the second day is
considered till 10:30 a.m. Only.

[Hence the client must pay money to the broker before 10:30 a.m. On T+2 day.
Settlement of securities is done by the clearing corporation of the exchange.

[Settlement of funds is done by a panel of banks registered with the

exchange.

[Clearing corporation identifies payable/ receivable position of brokers based

on which obligation report for brokers are created.

[On T+2 days all the brokers who has transacted two days before receive
shares or give shares to the clearing corporation of exchange.

[This all is done through automated set up Depository which involves NSDu
and CDSu
Type of the market

The trades in the NSE trading system can be executed in the continuous or the
negotiated market.

[ In the continuous market, orders entered by the trading members are matched by
the trading system. For each order entering the trading system, the system scans
for a probable match in the order books. On finding a match, a trade takes place.
In case, the order does not find a suitable counter order in the order books, it is
added to the order books and is called a passive order.

[ In a negotiated order, two parties enter into a contract with each other according
to their terms and conditions. Unlike a continuous order, it is a contract entered
into between those two parties only. The buyer and seller know each other and the
contract is entered into at mutual terms and conditions.
Market fluctuations

During market hours, the stocks are freely trading.

Market fluctuations are caused by an imbalance in supply and demand

or, more simply, buy orders and sell orders.

If there are more buy orders for a certain stock than there are sell
orders, the price of that stock will rise. If there are more sell orders for a
given stock than buy orders, the price of that stock will fall.

 The market constantly seeks a balance between buyers and sellers,

between supply and demand, and this causes the moment-to-moment
fluctuations in individual stocks and in the overall market
The scrips traded on BSE have been classified into vario s gro ps.

BSE has, for the guidance and benefit of the investors, classified the scrips in the
Equity Segment into 'Ô', 'B', 'T' and 'Z' groups on certain qualitative and
quantitative parameters.

The "F" Group represents the Fixed Income Securities.

The "T" Group represents scrips which are settled on a trade-to-trade basis as a
surveillance measure.

Trading in Government Securities by the retail investors is done under the "G"
group.

The 'Z' group was introduced by BSE in July 1999 and includes companies which
have failed to comply with its listing requirements and/or have failed to resolve
investor complaints and/or have not made the required arrangements with both the
depositories, viz., CDSu and NSDu for demat of their securities.
Comp tation af Closing árice af Scrips

The closing price of scrips is computed by BSE on the basis of weighted average
price of all trades executed during the last 30 minutes of a continuous trading
session. However, if there is no trade recorded during the last 30 minutes, then the
last traded price of scrip in the continuous trading session is taken as the official
closing price.

Basket Trading System

BSE has commenced trading in the Derivatives Segment with effect from June 9,
2000 to enable investors to hedge their risks. Initially, the facility of trading in the
Derivatives Segment was confined to Index Futures. Subsequently, BSE has
introduced the Index Options and Options & Futures in select individual stocks.
ifferent types of stock market indexes
½arket Val e-Weighted Index
The most common type of index. E.g. S&P 500, NÔSDÔQ
It measures the total value of all the outstanding stock issued by the various
companies in the index.
The reasoning behind a market value index is that companies with larger market
capitalizations or value will have a larger weighting in the index and will ³count
more´ than smaller companies.
Its one drawback is that sometimes one company or one type of industry can
make up a very large portion of the index. In the technology bubble of the late
90¶s, the tech portion of most broad based indices became quite dominant.

árice-Weighted Index
e.g. The Dow Jones Industrial Ôverage
 The index is calculated using a stock price instead of the company value.
Drawback is that a company that has a stock price of $100 will count twice as
much as a company with a stock price of $50. There is a formula used to
calculate these type of indices to account for stock splits.
Considerations
Over time, the value of some of the stock in the index will have price changes
not caused by market forces. Ô stock split cuts the stock price in half but does
not change the value of the company.
Market indexes periodically remove some companies and replace them with
other stocks that better fit the objectives of the index.
Ô company in the index might be merged or go bankrupt and have to be
replaced.

To keep an index relevant over time, the value needs to be adjusted for these
events.

Effects
In a price-weighted index, price changes in the more expensive stocks will have
a greater effect on the index value than will changes in less expensive stocks.

In a market-cap-weighted index, the index value is affected more by the

companies with more stock market value.
In the S&P 500, the 10 largest out of 500 companies account for 19 percent of
the index value



In a price-weighted index such as the DJIÔ, the price of each component stock
is the only consideration when determining the value of the index. Thus, price
movement of even a single security will heavily influence the value of the index
even though the dollar shift is less significant in a relatively highly valued issue,
and moreover ignoring the relative size of the company as a whole.

In contrast, a market-value weighted or capitalization-weighted index factors in

the size of the company. Thus, a relatively small shift in the price of a large
company will heavily influence the value of the index. In a market-share
weighted index, price is weighted relative to the number of shares, rather than
their total value.

Traditionally, capitalization- or share-weighted indices all had a full weighting,

i.e. all outstanding shares were included. recently, many of them have changed
to a floatJadjusted weighting which helps indexing.
Advantages of Free-Float market capitalization method

Ô market index should reflect the market movements.

Since the index funds follow a market index, it should consider only liquid scrips
and the active portion of the outstanding shares so that it reflects the market
conditions in a better way.

So free-float market capitalization method of calculating index value is suitable.

Passive investments such as FDI are easily replicable. It aids in index flexibility
and covers overall market (for market indices) and sectors (for sector indices).

It avoids the undue influence of any closely-held large-capitalization stock on the

index movement.

Ôll famous world market indices like NÔSDÔQ, Dow Jones, S&P use the Free-
float methodology.
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