This document discusses the trading mechanism of stock exchanges in India. It explains how the traditional open-outcry system was replaced by screen-based trading systems like NSE's NEAT and BSE's BOLT to provide more efficiency, liquidity, and transparency. It outlines the various types of orders that can be placed, such as buy/sell, price-based, and time-based orders. It then describes the six main steps involved in trading stocks on the exchange: finding a broker, opening an account, placing an order, order execution, contract note preparation, and contract settlement. Finally, it provides details on how online trading works through a network of computers and satellites.

1. CAPITAL MARKET
MODULE II

2. TRADING MECHANISM OF STOCK
EXCHANGE

3. INTRODUCTION
 The trading on stock exchange in INDIA
was open outcry method.
 This was time consuming and inefficient.
 This imposed limits on trading volumes
and efficiency.
 In order to provide efficiency, liquidity, and
transparency NSE and BSE introduced
nation wide online fully automated
“SCREEN BASED TRADING SYSTEM”

4. SCREEN BASED TRADING
 SCREEN BASED TRADING NSE’s screen
based trading is known as NEAT- National
exchange for automated trading.
 BSE’S screen based trading is known as
BOLT- Bombay online trading.
 Here order are match on the basis of time and
price priority.

5. TRADING PROCEDURES
 A non member is not permitted to enter the hall
of the stock exchange and cannot carry on biz
transactions personally.
 Following are the steps involved in the trading
(buying & selling) on the stock exchange

6.  STEP 1 : FINDING A BROKER
 STEP 2 : OPENING AN ACCOUNT WITH
THE BROKER
 STEP 3 : PLACING THE ORDER
 STEP 4 : EXECUTING THE ORDER
 STEP 5 : PREPRATION OF CONTRACT
NOTES
 STEP 6 : SETTLEMENT OF CONTRACTS
TRADING PROCEDURES

7. STEP 1 : FINDING A BROKER
 Select a broker for transacting business on
behalf of the investor.
 The stock broker is a licensed member of a
stock exchange. A buyer of securities selects a
broker who-
i. Provide information about the available
investment opportunities
ii. Provide necessary financial periodicals,
prospectus and reports of companies.
iii. Provide competent representatives who can
solve the investment problems.

8. STEP 2 : OPENING AN ACCOUNT WITH
THE BROKER
 After selection of the broker the investor will
proceed to open an account with the broker. A
broker opens an account in the name of
prospective client only if he is satisfied about
the credit worthiness of the investor. If the
broker is satisfied, he will open an account in
the name of that customer by writing his name
in the brokers book.

9. STEP 3 : PLACING THE ORDER
 After selection of broker & opening an account,
the investor places an order to buy a specified
no of shares of a specified company.
 Order can be placed by telephone, fax or in
person.
 The order should be in clear and precise terms

10. Different types of orders
 BUY ORDERS
Buy orders are placed when the security price is
expected to rise in price. If the investor is satisfied by the
current price, he can decide how much quantity to be
bought at a prescribed rate .
 SELL ORDERS
Placed when you want to dispose the security your own,
usually at a estimated price or when a decline in price is
expected.

12.  Limit order
It is an order for the purchase or sale of securities at a
fixed price specified by the client.
“ buy at Rs. 50 or less”
“ sell at Rs. 60 or more”
No guarantee that limit order will be executed
 Fixed price order
When the client specifies the price at which the
shares are to be purchased, it is known as fixed price
order.
 Stop loss order
It is an order to sell as soon as the price falls up to a
particular level or to buy when the price rises up to a
specified level. This is mainly to protect the clients against
a heavy fall or rise in price. So that they may not suffer
more than the specified unit.
Different types of orders (Cotn)

13. Different types of orders (Cotn)
 Stop loss sell order - A sell order in the Stop Loss
book gets triggered when the last traded price in the
normal market reaches or falls below the trigger price
of the order.
 Stop loss buy order - A buy order in the Stop Loss
book gets triggered when the last traded price in the
normal market reaches or exceeds the trigger price of
the order.
 Best price/ Market orders
A market order is an order executed at the
current market price. It will be executed at the
prevailing price on the exchange.

14.  Discretionary Order
It is an order to buy or sell securities at
whatever price the broker thinks reasonable. This is
possible when the client has complete faith on the
broker.
 Limited Discretionary Order
It is an order to buy or sell securities within a
specified price range and within the given time
period as per the judgment of the broker.
 Immediate or Cancel Order
A trader releases this type of order in to the
market for immediate execution. If the price is not
matched, the order is cancelled, and fresh order
Different types of orders (Cotn)

15.  Day Order
These orders are valid for the day in which
they were put in to the system. If they are not
executed till the close of the trading on the day,
at the end of the day they are automatically
cancelled.
 Good Till Day Order
A trader can place an order specifying the
no of days up to which it can remain open. If the
price did not reach at the ordered level, at the
end of the period the order is automatically
Different types of orders (Cotn)

16. Different types of orders (Cotn)
 (Un)Disclosed value order
This type of order enables an investor to release part
of the order value to the market without disclosing the full
value.
 Minimum fill order
A trader can specify the minimum number of orders that
should be filled by fixing upper and lower limits.
 All or None order
A trading member can stipulate conditions that the full
order should be matched. The orders received are
processed immediately to check matching. Unmatched
orders are stored in different books in the sequence of best
prices and time priority.

17. TYPES OF ORDERS
A. Buy orders
B. Sell orders
C. Price based orders
i. Price limit order
ii. Stop loss order
D. Best price/ Market orders
E. Time based orders
i. Day order
ii. Good till day order
iii. Immediate or cancel order
F. Discretionary order
G. Volume condition
i. (Un)Disclosed value order
ii. Minimum fill order
iii. All or none order

18. STEP 4 : EXECUTING THE
ORDER
 The execution of the orders submitted by
clients takes place between brokers acting on
behalf of the investors/clients.
 Buy orders are matched with sell orders.
 In the automated system, trading is carried out
in an anonymous environment and the orders
are matched by the computer system.

19. STEP 5 : PREPRATION OF CONTRACT
NOTES
 A contract note is a written agreement
between the broker and his client for the
transaction executed.
 It contains the details of the contract made for
the purchase or the sale of securities, the
brokerage chargeable, the name of the
company, number of shares bought or sold,
net rate etc..

20. STEP 6 :SETTLEMENT OF
CONTRACTS
 Settlement is made by means of delivering the
share certificates along with the transfer deed
 Settlement of trade is carried out through a
separate agency known as clearing house
which functions in each stock exchange.

21. Market phases
 Opening
 Pre open(9.00am to 9.15am)
 Market close(3.50 to 4.00pm) normal
market

22. Logging on
 User id
 Trading member id
 password

23. MECHANISM OF ONLINE
TRADING
 MECHANISM OF ONLINE TRADING 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.

24. HOW TO PLACE ORDER
 An investor informs 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. The
signal is directed to mainframe computer
at NSE via VSAT at NSE’s office. A
message relating to the order activity is
broad casted to respective member.

25. To enter a buy order
 BASIS OF OPERATION :
 BASIS OF OPERATION The online
trading operates on the strict basis of
PRICE PRIORITY and TIME PRIORITY

HOW TO ENTER SELL ORDER :
 HOW TO ENTER SELL ORDER Same as
the process involved in the placing of the
buy order

26. To enter a Sell order
 LOGGING ON :
 LOGGING ON On starting NEAT
application, the logon screen appears with
the following details. USER ID TRADING
MEMBER ID PASSWORD NEW
PASSWORD.

27. TERMINOLOGIES OF ONLINE
TRADING
Snap quote:- feature available to get
instantaneous market information on a desired
security.
Active and Passive orders:- when any order
enters the trading system, it is an active order.
It tries to find a match on the other side of
books. If it finds a match trade is generated,
if does not finds match it turns to passive order
which is stored in order book.

28. Cont.........
 Previous trade:- it is to provide security
wise information to user for own trades.
 outstanding order:-Purpose of
outstanding order is to enable user to view
the outstanding order for a security. Which
has not yet been completely traded or
cancelled.
 Purpose of MBP is to enable user to view
outstanding order in the market, at each
price and are display in order of best
price.