Trading and settlement

Each stock exchange has certain listed securities and permitted securities which are traded on it. Members of the exchange alone are entitled to the trading privileges. Investors interested in buying or selling securities should place their orders with the members (also called brokers) of the exchange.

There are two ways of organizing the trading activity the open outcry system and the screen based system.

Open Outcry System: As the nomenclature suggests, under the open outcry system, traders shout and resort to signals on the trading floor of the exchange which consists of several notional trading posts for different securities. A member (or his representative) wishing to buy or sell a certain security reaches the trading post where the security is traded. Here, he comes in contact with others interested in transacting in that security. Buyers make their bids and sellers make their offers and bargains are closed at mutually agreed upon prices. In stocks where jobbing is done the jobber plays an important role. He stands ready to buy or sell on his account. He quotes his bid (buying) and ask (selling) process. He provides some stability and continuity to the market.

Screen based System: In the screen based system, the trading ring is replaced by the computer screen and distant participants can trade with each other through the computer network. A large number of participants geographically separated can trade simultaneously at high speeds. The screen based trading system (1) enhances the informational efficiency of the market as more participants trade at a faster sped (2) permits the market participants to get a full view of the market, which increases their confidence in the market; and (3) establishes transparent audit trails. While computerized trading is more efficient, it decidedly lacks the vibrancy and vitality of the traditional floor trading. Technology seems to have its own way of pushing colorful traditions and practices into oblivion.

The kind of screen based trading system adopted in India is referred to as the open electronic limit order book (ELOB) market system. The key features of this system are as follows:
Buyers and sellers place their orders on the computer. These orders may limit orders or market orders. A limit order pre-specifies the price limit. For example, a limit order to buy at a price of Rs 90 means that trader wants to buy at a price not greater than Rs 90. Likewise a limit order to sell at a price of Rs 95 means that the trader wants to sell at a price not less than Rs 95. A market order is an order to buy or sell at the best prevailing price. A market order to sell will be executed at the highest bid price whereas a market order to buy will be executed as the lowest ask price.

The computer constantly tries to match mutually compatible orders. The matching is done on a price-time priority implying that price is given preference over time in the process of matching. A buy order at a higher limit price is accorded precedence over a buy order at a lower limit price. By the same token, a sell order at a lower limit price is given priority over a sell order at a higher limit price. Between two limit orders placed at the same price, the limit order placed earlier is accorded priority over the limit order placed later.

The limit order book, i.e. the list of unmatched limit orders is displayed on the screen. Put differently, it is open for inspection to all traders.


To mitigate the costs and risks associated with physical delivery, security transactions in developed markets are settled mainly through electronic delivery facilitated by depositories. A depository is an institution which dematerializes physical certificates and effects transfer of ownership by electronic book entries.

Tenable the creation of depositories to facilitate dematerialized trading in India, the central government promulgated the Depository Ordinance 1995 which was followed by the Depositories Act, 1996. The highlights of the Depositories Act are as follows:

1. Every depository will be required to be registered with the Securities and Exchange Board of India.
2. Investors will have the choice of continuing with the existing share certificates or opt for the depository mode.
3. Investors opting to join the depository mode are required to register with the agents for the depositories. These will be custodial agencies like banks, financial institutions and large brokerage firms.
4. While the depository will be the registered owner in the register of the company, the investor will enjoy the economic benefits as well as the voting rights on the shares concerned.
5. Shares in the depository mode will be fungible. This means that they will cease to have distinctive numbers
6. Investors having entered the depository mode can leave the system and get share certificates from the company as registered owners in the books of the company.
7. Ownership changes in the depository system will be made automatically on the basis of delivery against payment. Further there will be no stamp duty on transfer of ownership.
8. Any loss caused it the beneficial owners due to the negligence of the depository or the participants will be indemnified by the depository.

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