Trading procedure at 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.