Structure of Stock Exchanges
Dr. Mohinder Singh
Trading Mechanism
• Traders : They are the people who trade.
• Proprietary Traders : Own behalf
• Brokers : For other, Agency or commission traders
• Traders Position : Long position or Short Position
• Long Position : Buy at Low to sell at high (expect price to rise)
• Short Position : Sell at high to Buy at Low (expect price to fall), when they
repurchase they cover their position
• Sides of trading Industry : two sides i.e. Buy side (buy exchange services,
investors, ) and sell side (sell exchange services, broker or dealer)
• Trading Facilitators : Trading Platforms or Exchanges, Clearing House,
Custodian, Clearing Members, Depositories, DPs
Reasons for transactions in Stock Market
• Information Motivated Reasons
Better information of under pricing or
overpricing of the security
• Liquidity Motivated Reasons
Excess Money or Paucity of money
How to trade in stock Exchange
• Selection of a Broker
• Placing an order
• Order Matching
• Trade Execution
• Making the contract
• Clearing the trade
• Settlement of the Trade
Market Segment
• Capital Market
– Normal Market: Normal market consists of various book types in which orders are
segregated as Regular Lot Orders, Special Term Orders, and Stop Loss Orders depending on
the order attributes.
– Auction Market: In the auction market, auctions are initiated by the exchange on behalf of
trading members for settlement related reasons.
– Odd Lot Market: The odd lot market facility is used for the Limited Physical Market and for
the Block Trades Session.
– Retail Debt Market: The RETDEBT market facility on the NEAT system of capital market
segment is used for transactions in Retail Debt Market session.
• Future and Options
• Currency Derivative
• Commodity Derivative
• Wholesale Debt
Market Phases
The trading system is normally made available for trading on all days except Saturdays, Sundays and
other holidays.
• Opening: The trading member can carry out the following activities after login to the NEAT system
and before the market opens for trading:
– Set up Market Watch (the securities which the user would like to view on the screen)
– View Inquiry screens
– At the point of time when the market is opening for trading, the trading member cannot login to the system.
A message ‘Market status is changing. Cannot logon for sometime’ is displayed. If the member is already
logged in, he cannot perform trading activities till market is opened.
• Pre-open: The pre-open session is for duration of 15 minutes i.e. from 9:00 am to 9:15 am. The pre-
open session is comprised of Order collection period and order matching period.
– The order collection period of 8* minutes is provided for order entry, modification and cancellation.
– Order matching period starts immediately after completion of order collection period. Orders are matched
at a single (equilibrium) price which will be open price. The order matching happens in the following
sequence:
• Eligible limit orders are matched with eligible limit orders
• Residual eligible limit orders are matched with market orders
• Market orders are matched with market orders
• Normal Market Open Phase
• Market Close
• Post-Close Market
• Surcon: Surveillance and Control (SURCON)
Dewali Muhurat
Special trading sessions are announced by the exchange on time to time though public notices and
special trading session is also arranged for Diwali Muhurat trading if that doesn't fall under
normal trading hour
• For example
• Diwali Muhurat Trading / Deepavali 2019 Muhurat Trading will be held on Sunday, October
27, 2019 from 5:30 PM to 6:30 PM (Diwali Amavasya - Laxmi Puja) time.
• Pre-open for NSE and BSE Cash: 5:15 to 5:23 PM
• Normal trading: 5:30 to 6:30 PM
• Block Deal: Block Deal
• Call Auction: 5:35 to 6:20 PM
• Post Closing: 6:40 to 6:50 PM
• Note that being a special trading session so all the trades executed in this Diwali Muhurat
trading session are in settlement obligations.
Brokers
• Age – 21 years and HSC
• Security: Deposit (₹ 26.5 lakh to ₹ 70 Lakh.),
• Net worth : ₹75 lakh to ₹ 1000 Lakh
• There are three types of stock brokers:
Full Service Broker (Also guide investor) –Starter/Discount Broker -
( experienced)/Direct-Access Broker by electronic communication networks (ECN's) –
Expert and Day traders
• Registration of Brokers "INB" for Brokers, “INS“ for sub brokers and “INF” for derivative
• Fees and Charges: Application Processing Fees: 10,000/- + Applicable Tax./ Admission
Fees : One time ₹ 5,00,000/- plus applicable tax or ₹ 1,00,000/- (Debt Segment) / Annual
subscription charges : 1,00,000 ( Corporate) and 50,000 for others
Type of Stock Exchange Membership
Types of Membership Cash Futures & Currency Debt WDM
Segment Option Derivatives Segment Segment
Segment Segment
- Yes Yes Yes -
Trading Member
Trading Cum Self Yes Yes Yes Yes Yes
Clearing Member
Trading Cum Clearing - Yes Yes Yes -
Member
Professional Clearing - Yes Yes Yes
Member
Membership can be taken in combination with any of the above segments except for
Futures & Options segment which has to be taken in combination with Cash segment.
Brokers…..
• Required to sign any agreement with the broker “Member - Client agreement” and ”Broker -
Sub broker - Client Tripartite Agreement” in case of sub- broker .
• Unique Client Code to strengthen the know your client (KYC) norms
• Risk disclosure document between investor and broker
• One can either go to the broker’s / sub broker’s office or place an order over the phone /
internet or as defined in the Model Agreement.
• Stock Exchanges assign a Unique Order Code Number to each transaction
• Contract note in Form A to be given within stipulated time that gives rise to contractual
rights and obligations of parties of the trade
• A broker cannot charge more than 2.5% brokerage
• Securities Transaction Tax (STT), revised STT for delivery-based equity trading is 0.1% on the
turnover, and .025% NSE 0.017% 0n future and option
Comparing Brokers
Main Brokers
• Overall Rating (Out of 5) 1. ICICI Direct 4. Axis Direct
2. Sharekhan
• Broker Type (Discount or Full Service)
3. Angel Broking
• Brokerage Charges 4. Zerodha
• Trading Platform 5. Upstox
6. SAMCO
• Investments Offering 7. 5paisa
• Customer Service 8. Kotak Sec.
9. Hdfc Sec.
• Exchanges Supported
10.Geojit
• 3-in-1 Account 11.Fyers
12.Tradeplus
13.Motilal Oswal
Placing an Order
Order Precedence Rules
• Order Matching System
Rank order – First by primary condition than by secondary condition
– By Price (preference to the best price)
• Best Buy-Lowest Ask price
• Best sell- Highest Bid Price
– Market order are given preference over limit Order
– Time Precedence – FIFO
– Public Precedence : Public over member of Exchange
– Display Precedence : Displayed over Undisclosed
– Size Precedence : Large over small or Small over Large or on Proportionate basis
Example : 100 shares @ Rs. 35.00 at time 10:30 a.m.
500 shares @ Rs. 35.05 at time 10:43 a.m.
200 shares @ Rs. 72.75 at time 10:30 a.m.
300 shares @ Rs. 72.75 at time 10:31 a.m.
200 shares @ Rs. 72.75 at time 10:31 a.m.
300 shares @ Rs. 72.75 at time 10:31 a.m.
200 shares @ Rs. 72.75 at time 10:31 a.m.
………. shares @ Rs. 72.75 at time 10:31 a.m.
Order Book
Share Order Book Demand/Supply Maximum
Price schedule tradable
Quantity
Buy Sell Demand Supply
100 13500 11500 50500 11500 11500
104 9500 9500 37000 21300 21300
105 12000 15000 27500 36300 27500
106 6500 12000 15500 48300 15500
107 5000 12500 9000 60800 9000
108 4000 8500 4000 69300 4000
Price Bands or circuit breakers
• Index-based market-wide circuit breaker system at three stages of the
index movement either way at 10%, 15% and 20% has been prescribed.
The breakers are triggered by movement of either S&P CNX Nifty or
Sensex, whichever is breached earlier.
• Individual scrip-wise price bands
– Daily price bands of 2% (either way) on securities as specified by the Exchange.
– Daily price bands of 5% (either way) on securities as specified by the Exchange.
– Daily price bands of 10% (either way) on securities as specified by the Exchange.
– No price bands are applicable on: A group security, scrips on which derivative
products are available or scrips included in indices on which derivative products are
available and on day of listing of the stock.
Contract note
• Name, address and SEBI Registration number of the Member broker.
• Name of partner /proprietor /Authorised Signatory.
• Dealing Office Address/Tel No/Fax no, Code number of the member given by the Exchange.
• Unique Identification Number
• Contract number, date of issue of contract note, settlement number and time period for settlement.
• Constituent (Client) name/Code Number.
• Order number and order time corresponding to the trades.
• Trade number and Trade time.
• Quantity and Kind of Security brought/sold by the client.
• Brokerage and Purchase /Sale rate are given separately.
• Service tax rates and any other charges levied by the broker.
• Securities Transaction Tax (STT) as applicable.
• Appropriate stamps have to be affixed on the original contract note or it is mentioned that the consolidated
stamp duty is paid.
• Signature of the Stock broker/Authorized Signatory.
Settlement
• Account Period Settlement
A settlement where the trades pertaining to a period stretching over more than one day are
settled. For example, trades for the period Monday to Friday are settled together. The
obligations for the account period are settled on a net basis. Account period settlement has
been discontinued since January 1, 2002.
• Rolling Settlement
In a Rolling Settlement, trades executed during the day are settled based on the net
obligations for the day. Presently the trades pertaining to the rolling settlement are
settled on a T+2 day basis where T stands for the trade day. Hence, trades executed on a
Monday are typically settled on the following Wednesday (considering 2 working days
from the trade day). The funds and securities pay-in and pay-out are carried out on T+2
day w.e.f April 1st , 2003. Pay out of funds and securities to the clients is done by the
broker within 24 hours of the payout.
Settlement Agencies
• The Clearing House, with the help of clearing members, custodians, clearing
banks and depositories settles the trades executed on exchanges.
– NSCCL or ICCL ( are responsible for post-trade activities of a stock exchange. Clearing
and settlement of trades and risk management are its central functions. )
– Clearing Members (They are responsible for settling their obligations as determined by the
NSCCL/ICCL. They have to make available funds and/or securities in the designated accounts with
clearing bank/depositories, as the case may be, to meet their obligations on the settlement day.)
– Custodians (Custodian is a clearing member but not a trading member. He settles trades
assigned to him by trading members.)
– Clearing Banks
– Depositories
– Professional Clearing Member (clear and settle trades executed for their clients
(individuals, institutions etc.)
Market Structure
• Order Driven
All are Auction Market- Outcry or online, where buyer and seller seek
best available price
Buyer and sellers regularly trade with each other without the
intermediation of the dealers
Trading rules and Order precedence rules
Traders can not choose to whom they can trade
Single or Onetime Price or Continuous
• Quote Driven or dealer Market
• Brokered Driven
Settlement Cycle
Pay-in day and Pay- out day
• Pay in day is the day when the brokers shall make payment or delivery of securities to the
exchange.
• Pay out day is the day when the exchange makes payment or delivery of securities to the broker.
• The exchanges have to ensure that the pay out of funds and securities to the clients is done by
the broker within 24 hours of the payout.
• The Exchanges issue press release immediately after pay out.
• Faster delivery in beneficial owner accounts by giving details of beneficial owner account and the
DP-ID of DP to broker along with the Standing Instructions for ‘Delivery-In’ to Depository
Participant for accepting shares in beneficial owner account. The Clearing Corporation/Clearing
House shall send pay out instructions to the depositories so that one can receive pay out of
securities directly into one’s beneficial owner account.
Typical settlement cycle for normal (regular) market segment
Activity Day
Trading Rolling Settlement Trading T
Clearing Custodial Confirmation T+1 working days
Delivery Generation T+1 working days
Settlement Securities and Funds pay in T+2 working days
Securities and Funds pay out T+2 working days
Post Settlement Valuation Debit T+2 working days
Auction T+3 working days
Bad Delivery Reporting T+4 working days
Auction settlement T+5 working days
Close out T+5 working days
Rectified bad delivery pay-in and
T+6 working days
pay-out
Re-bad delivery reporting and
T+8 working days
pickup
Close out of re-bad delivery T+9 working days
Type of speculators
• Bull (tezibala)
• Bear (Mandiwala)
• Stag (Cowardice)
• Lame Duck
• Tarawaniwala
• Jobbers : Member brokers of a stock exchange who specialize, by giving two
way quotations, in buying and selling of securities from and to fellow members.
Jobbers do not have any direct contact with the public but they serve the useful
function of imparting liquidity to the market.
Transaction Costs
Thanks to the introduction of screen-based trading and electronic
delivery transaction costs have fallen sharply in India.
MID - 1993 TODAY
TRADING 3.75% 0.40%
BROKERAGE COST 3.00% 0.25%
MARKET IMPACT COST 0.75% 0.15%
Clearing & Counterparty Risk PRESENT ABSENT
Settlement 1.25% 0.10%
Paperwork Cost 0.75% 0.10%
Bad paper Risk 0.50% 0.00%
TOTAL 5.00% (+RISK) 0.50%
Taxation of Stock Trading
• Day Trading : Speculative Business Income as
per tax bracket
• STCG : STT @15 %
• LTCG : Exempted till 31.3.2018
