Trading Procedure at Stock Exchanges

The trading procedure at stock exchanges can be complex, and the specific procedures can vary depending on the exchange and the types of securities being traded. However, in general, the trading procedure at stock exchanges involves several key steps, including market opening, order placement, order matching, trade confirmation, and trade settlement.

Market Opening: The stock exchange’s market opening is typically announced, and trading begins at the designated time. The exact time of the market opening may vary depending on the exchange, but it is typically during normal business hours. The opening is often signaled by a bell or other announcement, and traders begin placing orders to buy or sell securities.

Order Placement: Traders place orders to buy or sell securities through their brokers. Orders can be placed using various methods, including phone, electronic trading platforms, or directly on the exchange floor. These orders are typically accompanied by specific instructions regarding the price and quantity of securities the trader wishes to buy or sell.

Brokers are registered professionals who are authorized to trade securities on behalf of their clients. They must be members of the exchange and comply with all relevant regulations, including registration with regulatory authorities and compliance with specific trading standards. Brokers also provide a range of services to their clients, including research, advice, and assistance with the trading process.

Order Matching: Once orders are placed, the exchange matches buy and sell orders based on price and quantity. The exchange attempts to match buy and sell orders as efficiently as possible to ensure that orders are filled quickly and at the best available price.

The exchange uses a range of algorithms and technologies to ensure that orders are matched as fairly and accurately as possible. These algorithms typically prioritize orders based on price, with higher-priced orders receiving priority over lower-priced orders. The exchange may also use a time priority algorithm, which gives priority to the earliest orders received at a particular price.

In some cases, the exchange may not be able to match buy and sell orders immediately. This can occur when there is insufficient liquidity or when the price of a security is highly volatile. In these cases, the exchange may delay the execution of an order or hold the order until the market conditions are more favorable.

Trade Confirmation: Once the orders are matched, the exchange confirms the trades with the brokers involved. The brokers then notify their clients of the trade details, including the price and quantity of the security bought or sold.

Trade confirmation is an important part of the trading process, as it ensures that all parties involved in the transaction are aware of the details of the trade. This helps to prevent errors or misunderstandings and allows traders to monitor their portfolios more effectively. In many cases, trade confirmation is provided automatically by the exchange or by the broker.

Trade Settlement: Finally, the settlement process occurs, where the actual transfer of the security and payment occurs between the buyers and sellers of the security. Settlement can occur immediately or be delayed depending on the exchange and the specific securities being traded.

In most cases, the settlement process involves the exchange acting as an intermediary between the buyer and seller. The exchange transfers the security from the seller’s account to the buyer’s account, while simultaneously transferring the payment from the buyer’s account to the seller’s account. This transfer typically occurs electronically and is facilitated by the exchange’s clearinghouse.

The timing of the settlement can vary depending on the market and the specific securities traded. In some cases, settlement can occur on the same day as the trade, while in other cases, settlement can be delayed for several days or even weeks. The exact timing of the settlement is often determined by regulations and industry standards, and it can also be influenced by market conditions and the specific securities being traded.

Trading Procedure at Indian Stock Exchanges

The trading system for securities at all the stock exchanges is a completely on-line Screen-Based Trading System(SBTS) accessible to all its trading members on equal time basis. The telecommunications link, connecting the trading workstation on trading-member premises to the mainframe computer is of crucial importance for the exchange to provide on-line responses within a few seconds. The permission to applicants selected as Trading members to trade on the Exchange is accorded in groups as Telecom Network expands progressively to cover all eligible trading members. The VSAT telecommunication network works as a closed user group and is available only to its members. For trading on the system, the trading member will also require a workstation which he is expected to purchase along with requisite software. The trading system provides enormous flexibility to trading members. While entering an order, a trading member can place various conditions on the order. The member may place limit on the price. The order may be matched at (a) the best price available, or (b) it may be a limit order, i.e., the order will match only if the price is better than the limit placed by the member. The trading member may specify the time period for which the order will be valid. Orders are matched automatically by the computer system. An order entering the system is unique order and gets a unique time stamp. The system conceals the identity of the trading member entering the order.

Salient features of trading system at NSE:

At present, NSE is the largest stock exchange operating in India in terms of volume as well as number of members. The NSE has a fully automated screen-based trading system. It operates on the principle of an order-driven market providing complete flexibility to the members in the kind of orders that can be placed by them. The total systems solution adopted by the NSE involves a technology which is the state-of-art. The trading is entirely screen-based with automated order matching. The screen provides entire market information at the press of a button instantaneously. At the same time, the system provides for concealment of the identity of market operators. The screen gives all the information which is dynamically updated. As the market participants sit in their own offices, they have all the advantages of back office support, and facility to get in touch with their constitutes.

The trading system of the NSE is known as National Stock Exchange Automated Trading (NEAT). The NSE is connected through a VSAT (Very Small Earth-based Aperture Terminal) or through leased telephone lines with all members. Each trading-member trades on the NSE with other members through a computer located at the trading member’s office, anywhere in India, Satellite links are established using VSAT’s at the offices of the trading members. The brokers can sit in their own offices and trade on the system which offers versatile trading solution. Through the network, all the members receive complete market information (best order value, best buying price, best selling price, order value available and last traded price apart from any macro level information from the corporate and other significant announcements) simultaneously.

Recommended Reading: The National Stock Exchange of India Limited (NSE)

Trading System and Investors:

An investor can place the order for buy or sell at a particular price and particular quantity. The system arranges all orders in the priority of price and within price by time. Say, there is a buy order for 100 shares of company A at Rs. 285 and another investor has placed a buy order at Rs. 290. So, anyone who places a sell order in company A will be first matched with the buy order of second investor as he has given a better price. This is price priority if both have quoted Rs. 285 as the price at which somebody wants to buy shares of company A, then sell order which comes into the system, at this price will be matched against the order which was placed first.

The NSE trading system matches orders in such a way that the order gets executed at a price which is either equal to or better than the specified price but never worse than it. Therefore, if there is an order for selling 100 shares at the rate of Rs. 50, the order will be traded in the system in such a way that it will get a sale price of Rs. 50 or more but never less. Similarly, if there is an order for buying 100 shares at the rate of Rs. 50, it will be traded in the system in such a way that it will get a buy price of Rs. 50 or less but never more. An investor can ascertain the exact rate at, which any deal has been executed.

The NSE trading system (NEAT) generates and maintains an audit trail of the orders entered on the system by assigning a unique order number to all the orders placed on the NEAT system. An investor can ask trading-member to give the unique order number that the system has assigned to the order. Further, as soon as an order is executed, a trade confirmation slip is generated which displays the trade number, trade time, quantity and price at which trade took place and the corresponding order number. Trading members are obligated to give their clients a trade confirmation slip, the moment a trade takes place. By looking at the trade slip, one can actually verify the rate at which the order was traded.

Contract note is a confirmation of trade(s) done on a particular day for and on behalf of a client. A contract note issued in the format and manner prescribed by NSE establishes a legally enforceable relationship between the trading member and client in respect of settlement of trades executed on the Exchange as stated in the contract note. Contract notes are made in duplicate, and the member and client both keep one copy each. The said contract notes should be signed by a trading member or by an authorised signatory of the trading member. After verifying the details contained therein, the second copy of contract note should be returned to the trading member duly acknowledged by the investor. An investor must insist on getting contract/purchase/sale notes for trades executed.

These documents are very important to enforce the deals transacted through the trading member/sub-broker. In case of disputes/claims/differences, these documents would help to prove that the transactions have been executed on the Exchange through NSE TM/Registered sub-broker. These documents are a prerequisite for filing a complaint or arbitration proceeding against TM/Registered sub-broker. To ensure that the contract note issued by the trading member is a valid one, the investor must verify the details. The contract note should be in prescribed format and should contain the following :

  • Name and address of the trading member.
  • The SEBI registration number of the trading member.
  • Details of trade, viz., Order number, trade number, trade time, security name, quantity, rate, brokerage, etc.
  • The trade price should be shown separately from the brokerage charged.

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