The open outcry system, prevalent a few years ago on regional stock exchanges, has been replaced by on-line screen based electronic trading system. NSE and OTCEI had adopted screen based trading right from inception. With almost all the exchanges going electronic, trading has shifted from the floor to the brokers’ office where trades are executed through a computer terminal. All stock exchanges together have 8,000 terminals spread across the country. In a screen based trading system, a member can feed into the computer the number of securities and the prices at which he would like to transact and the transaction is executed as soon as if finds a matching order from a counter party. The electronic trading system is superior top the open outcry system of the past. It ensures transparency, as it enables participants to see the full market during real time. It increases information efficiency by allowing faster incorporation of price sensitive information into prevailing prices and thereby helps in efficient price discovery. This also results in operational efficiency as there is a reduction in time, cost, risk of error, and fraud and elimination of a chain of brokers and jobbers, which result in low transaction costs. This system has enabled a large number of participants, in every part of the country to trade in full anonymity with one another simultaneously, thereby improving the depth and liquidity of the market. This has lead to the integration of different trading centers spread all over the country into a single trading platform.
SEBI has permitted the setting up of trading terminals abroad as well as Internet trading. Now investors in any part of the world can route the order through the Internet for trading in Indian scrips. Internet trading is more cost effective than using trading terminals.
There are two types of trading systems – order driven system and quote driven trading system. In the order driven system, orders from all over the country are entered into an electronic system and matched directly and continuously without the involvement of a jobber or a market maker. In the quote driven system, there are market makers who continuously offer two way quotes – buy and sell quotes and are willing to buy and sell any quantity. BSE provides both these systems. NSE provides only the order driven system.
Trading Rules and Regulations:
Strict rules and regulations have been framed to prevent unfair trading practices and insider trading. The trading rules relate to the margin system, intra-day trading limit, and exposure limit. Brokers are levied various types of margins such as daily margins, mark to market margin, ad hoc margin, volatility margins, and so on to check price volatility.
SEBI has shifted the margining system from net basis to gross basis (sale and purchase) with effect from September 3, 2001, and introduced 99 per cent value at risk (VAR) based margin for all scrips in the compulsory rolling system with effect from July 2, 2001. Value at risk measures the worst expected potential loss from an unlikely adverse event in a normal everyday market environment. Prior to VAR, trade positions were reported at book value only no considerations were made for market changes. This margin is kept in a manner that covers price movements for more than 99 per cent of the time. Usually three sigma (standard deviation) is used for the measurement.
The intra-day trading limit to volume is specified and no broker’s trading volume can exceed this limit. If a broker wishes to exceed the limit he has to deposit additional capital with the exchange. The upper limit for the gross exposure of a broker is fixed at 20 times his capital to ensure market safety. Besides these, there are capital adequacy norms for members, indemnity insurance, and on line position monitoring by exchanges.
To ensure fair trading practices, SEBI has formulated Insider Trading Regulations prohibiting insider trading and made it a criminal offence. To enhance transparency of the takeover process and to protect the interests of minority shareholders there are now separate regulations relating to acquisitions and takeovers.