Trading Mechanism

Topics: Stock market, Stock exchange, Financial markets Pages: 10 (2812 words) Published: February 27, 2013
Trading Mechanism in National Stock Exchange

1. Introduction

1.1 Meaning of Trading Mechanism

The trading mechanism in the stock exchange is based on a transaction between a buyer, seller, and a trading specialist who actually executes transactions in a stock exchange. In general, the trading mechanism is similar to a simple auction, with investors biddng on a particular stock or security. If the bid is accepted by the owner of the security, the trading specialist executes the sale. Most major stock exchanges trade a collection of stocks, bonds, and other domestic and foreign investments.

1.2 Purpose

The trading mechanism exists because of the constant need to channel money from investors into business entities. Investors range from wealthy individuals and investment funds to small-scale investors saving for retirement. Entities that raise money in the stock market include corporations, governments, and government agencies. The combination of investors and borrowers creates the market for securities. The trading mechanism refines the market by matching buyers and sellers with the prices they are willing to pay or take.

2. Trading Mechanism at National Stock Exchange

The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time consuming and inefficient. This imposed limits on trading volumes and efficiency. In order to provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully automated screen based trading system (SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds a matching sale or buy order from a counter party. The screen based trading system offers various advantages such as: • Removes time, cost and risk of error and thereby improves operational efficiency • Faster incorporation of price sensitive information

• Improves the depth and liquidity of the market
• Provides full anonymity by accepting orders, big or small, from members without revealing their identity • Offers perfect audit trail which helps to resolve disputes by logging in the trade execution process in entirety •

Later, NSE carried the trading platform further to the PCs at the residence of investors through the Internet and to handheld devices through Wireless Application Protocol (WAP) for convenience of mobile investors.

2.1 Trading Network- National Exchange for Trading (NEAT)

NSE has main computer which is connected through Very Small Aperture Terminal (VSAT) installed at its office. The main computer runs on a fault tolerant STRATUS mainframe computer at the Exchange. Brokers have terminals installed at their premises which are connected through VSATs/leased lines/modems. An investor informs a broker to place an order on his behalf. The broker enters the order through his PC, which runs under Windows NT and sends signal to the Satellite via VSAT/leased line/modem. The signal is directed to mainframe computer at NSE via VSAT at NSE’s office. A message relating to the order activity is broadcast to the respective member. The order confirmation message is immediately displayed on the PC of the broker. This order matches with the existing passive order(s) otherwise it waits for the active orders to enter the system. On order matching, a message is broadcast to the respective member.

2.2 Corporate Hierarchy

The trading member has the facility of defining a hierarchy amongst its users of the NEAT system. This hierarchy comprises:

Corporate Manager: The corporate manager is a term assigned to a user placed at the highest level in a trading firm. Such a user receives the end-of-day reports for all branches of the trading member.

Branch Manager: The branch manager receives end-of-day reports for all the dealers under that...

References: Keim, D.B., and A. Madhavan. 1995. The anatomy of the trading process: Empirical
evidence on the behavior of institutional traders
Kraus, Alan, and Hans R. Stoll. 1972. Price Impacts of Block Trading on the New York
Stock Exchange
Madhavan, A. 1995. Consolidation, fragmentation, and the disclosure of trading
National Stock Exchange of India. 2008. NSE Fact book 2007-08. Retrieved from
National Stock Exchange of India. 2006. Indian Securities Market – A Review. IX.
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