56689921-Working-of-Stock-Exchanges.doc

BYSHARMA MUKTATYBMS SIXTH SEMESTER2001-2002.IntroductionOf all the modern service institutions, stock exchanges are perhaps the most crucialagents and facilitators of entrepreneurial progress. After the industrial revolution, asthesizeofbusinessenterprisesgrew,it wasnolongerpossibleforproprietorsorpartnerships to raise colossal amount of money required for undertaking largeentrepreneurial ventures. Such huge requirement of capital could only be met by theparticipation of a very large number of investors their numbers running intohundreds, thousands and even millions, depending on the size of business venture.!n general, small time proprietors, or partners of a proprietary or partnership firm, arelikely to find it rather difficult to get out of their business should they for some reasonwish to do so. "his is so because it is not always possible to find buyers for an entirebusiness or a part of business, #ust when one wishes to sell it. Similarly, it is not easyfor someone with savings, especially with a small amount of savings, to readily findan appropriate business opportunity, or a part thereof, for investment. "hese problemswill be even more magnified in large proprietorships and partnerships. $obody wouldlike to invest in such partnerships in the first place, since once invested, their savingswould be very difficult to convert into cash. And most people have lots of reasons,such as better investment opportunity, marriage, education, death, health and so on forwanting to convert their savings into cash. %learly then, big enterprises will be able toraise capital from the public at large only if there were some mechanism by which theinvestors could purchase or sell their share of business as ands they wished to do so."his implies that ownership in business has to be &broken up' into a lager number ofsmall units, suchthat eachunit maybeindependently(easilybought andsoldwithout hamperingthebusinessactivityassuch. Also, suchbreakingofbusinessownershipwouldhelpmobilizesmall savingsintheeconomyintoentrepreneurialventures."his end is achieved in a modern business through the mechanism of shares. What is a shar!A share represents the smallest recognized fraction of ownership in a publicly heldbusiness. )ach such fraction of ownership is represented in the form of a certificateknown as a shar crti"icat."he breaking up of total ownership of a business intosmall fragments, each fragment represented by a share certificate, enables them to beeasily bought and sold.What is a stoc# $chan%!Th institution &hr this 'u(in% and s))in% o" shars ssntia))( ta#s *)ac isth Stoc# E$chan%. !n the absence of stock exchanges, ie. !nstitutions where small chunks of businessescouldbetraded, therewouldbenomodernbusinessintheformofpubliclyheldcompanies. "oday, owingtothestockexchanges, onecanbepart ownersofonecompany today and another company tomorrow one can be part owners in severalcompanies at thesame time onecanbepart owner inacompanyhundreds orthousands of miles away onecanbeall of thesethings. "hus byenablingtheconvertibility of ownership in the product market into financial assets, namely shares,stock exchanges bring together buyers and sellers *or their representatives+ offractionalownershipsof companies.And forthat veryreason,activities relating tostockexchangesarealsoappropriatelyenough, knownasstockmarket orsecuritymarket. Also a stock exchange is distinguished by a specific locality andcharacteristics of its own, mostly a stock exchange is also distinguished by a physicallocation and characteristics of its own. !n fact, according to ,.".-arekh, the earliestlocation of the .ombay Stock )xchange, which for a long period was known as &thenative share and stock brokers/ association', was probably under a tree around 01234"hestockexchanges aretheexclusivecenters for thetradingof securities. "heregulatory framework encourages this by virtually banning trading of securitiesoutside exchanges. 5ntil recently, the area of operation6 #urisdiction of exchange wasspecified at the time of its recognition, which in effect precluded competition amongthe exchanges. "hese are called regional exchanges. !n order to provide anopportunitytoinvestorstoinvest6 tradeinthesecuritiesoflocal companies, it ismandatory foe the companies, wishing to list their securities, to list on the regionalstock exchange nearest to their registered office. +haractristics o" Stoc# E$chan%s in India "raditionally, a stock exchange has been an association of individual memberscalled member brokers *or simply members or brokers+, formed for theexpress purpose of regulating and facilitating buying and selling of securitiesby the public and institution at large. A stock exchange in !ndia operates with due recognition from the governmentunder the Securities and %ontracts *7egulations+ Act, 089:. the memberbrokers are essentially the middlemen who carry out the desired transactionsin securities on behalf of the public*for a commission+ or on their own behalf.$ew membership to a Stock )xchange is through election by the governingboard of that stock exchange.At present, thereare;ood@"ill@Bay,!mmediate@or@%ancel+, pricerelated*buy6sell limit andstop@lossorders+orvolumerelated *All@or@$one, ?inimum Cill, etc.+ conditions van be easily built into an order.Orders are sortedandmatchautomaticallybythecomputer keepingthesystemtransparent, ob#ectiveandfair. "hetradingsystemalsoprovidescompletemarketinformation on@line, which is updated on real time basis. "he trading platform of the%?segment of$S)isaccessednot onlyfromthecomputer terminalsfromthepremises of brokers spread over D;3 cities, but also from the personal computers inthe homes of investors through the internet and from the hand@held devices throughFA-. "he trading platform of .S) is also accessible from D33 cities. !nternet trading is available on $S) and .S), as of now. S).! has approved the useof !nternet as anorder routingsystem, for communicatingclients/orders totheexchanges throughbrokers. S).!@ registeredbrokers canintroduceinternet@basedtradingafterobtainingpermissionfromtherespectiveStock)xchanges. S).!hasstipulated the minimum conditions to be fulfilled by trading members to start internet@based trading and services. $S) was the first exchange in the country to provide web@based access to investors totrade directly on the exchange. !t launched !nternet trading in Cebruary ;333. !t wasfollowedbythe launchof !nternet tradingby.S)in?arch;330. "he ordersoriginatingfromthepersonal computers*-%s+ofinvestorsareroutedthroughthe!nternet tot ehtradingterminals of thedesignatedbrokers withwhomtheyhaverelations and further to the exchange of trade execution. Soon after these orders getmatched and result into trades, the investors get confirmation about them on their -%sthrough the same !nternet routes. S).! approved trading through wireless medium or FA- platform. $S) is the onlyexchange to provide access to its order book through the hand held devices, which useFA- technology. "his serves primarily retail investors who are mobile and want totrade from any place when the market prices for st3ocks of their choice are attractive./,at Tradin%A depository holds securities in dematerialized form. !t maintains ownership recordsof securities in a book entry form and also effects transfer of ownership through bookentry. S).! has introduced some degree of compulsion in trading and settlement ofsecurities in dematerialized form. Fhile the investors have a right to hold securities ineither physical or demat form, S).! has mandated compulsory trading and settlementofsecuritiesindematerializedform. "hiswasinitiallyintroducedforinstitutionalinvestors and was later extended to all investors. Starting with 0; scrips on Ganuary09, 0881,all investorsarerequiredtomandatorilytradeindematerializedforminrespect of ;,State bank of !ndiaCinance?"$E "elecomSatyam computers !nformation technologyLee telefilms ?edia7anbaxy labs ,ealthcare!%!%! CinanceEarsen ( toubro Biversified%ipla ,ealthcare,indalco ?etals and mining,-%E ?etal and mining"!S%O ?etal and mining$estle C?%>Tradin% S(st,"ill $ow, buyers and sellers used to negotiate face@to@face on the trading floor over asecurity until agreement was reached and a deal was struck in the open outcry systemof trading, that used to take place in the trading ring. "he transaction details of theaccount period *called settlement period+ were submitted for settlement by membersafter each trading session. "hecomputerizedsettlement systeminitiatedthenettingandclearingprocess byproviding on a daily basis statements for each member, showing matched andunmatched transactions. Settlement processing involves computation of eachmemberMs net position in each security, after taking into account all transactions forthememberduringthesettlement period, whichis03workingdaysforgroupMAMsecurities and 9 working days for group M.M securities."rading is done by members and their authorized assistants from their "rader ForkStations *"FS+ in their offices, through the .S) On@Eine "rading *.OE"+ system..OE" system has replaced the open outcry system of trading. .OE" system acceptstwo@wayquotationsfrom#obbers, market andlimit ordersfromclient@brokersandmatches them according to the matching logic specified in the .usiness 7equirementSpecifications *.7S+ document for this system. "he matching logic for the %arry@Corward System as in the case of the regular tradingsystem is quote driven with the order book functioning as an Jauxiliary #obberJ.TRA/I0: TRA/I0: "he )xchange, which had an open outcry trading system, had switched over to a fullyautomatedcomputerizedmodeoftradingknownas.OE" *.S)onEine "rading+System. "hrough the .OE" system the members now enter orders from "rader ForkStations *"FSs+ installed in their offices instead of assembling in the trading ring."his system, which was initially both order and quote driven, was commissioned on?arch 0D, 0889. ,owever, the facility of placing of quotes has been removed w.e.f.,August 0A7OB!A $A>A7,>,A"AO-)7 *)+, [email protected] SEMESTER 2001-2002.-7OG)%" >5!B)2R15. 2ARAATI AE0KATESHC7O?S.K. S1MAIYA +1--E:E 15 ARTS@ S+IE0+EA0/ +1MMER+E.AI/YAAIHAR 6E9. MUMBAI-D000EE./ATE 15 SUBMISSI10;A c k n o 6 " e d - e ! e n t#t gi$es %e !easure to sub%it this !ro&ect to the'ni$ersit" o( )u%bai as a !art o( curricuu% o( %"B)S course.# ta*e this o!!ortunit" to e+!ress %" sinceregratitu,eto-es!ecte,7rof. 8. +enkatra!ani9the .rinci!a, S./. So%ai"a 0oege o( 1rts, Science&0o%%ercean,our 0ourse0oor,inator,7rof.7ar*ati +enkates/92ho si%utaneous" is %"!ro&ect gui,e aso, 2ithout 2hose gui,ance,ins!iration an, %oti$ation, # cou, not ha$eco%!ete, this !ro&ect success(u".)" res!ect an, grate(u than*s to Mr..i"ip Adani90roker, Stoc* 3+change, )u%bai, an,Ms.:itan;a"i Madan, Stoc* 4o,ing 0or!oration o(#n,ia 5t,. (or their $auabe assistance inco%!etion o( this !ro&ect.5ast but not the east, # a%than*(u to the1%ight" (or gi$ing %e strength, courage an,!atience to co%!ete this !ro&ect.#6738. #6738. )xecutive summary. !ntroduction. Eight on stock exchange and it services. 7ole of S).!. "erminologies associated with stock exchanges. Bo,'a( Stoc# E$chan%. !ntroduction. %apital listed and market capitalization. .S) Sensex. "rading system. Settlement and clearing. Bemat pay in. %omputation of closing price. Shortages and ob#ections. .asket trading system. Settlement system. %losing system. Opportunities for foreign investors. "ransfer of ownership. Safeguards. Arbitration machinery. %ustomer protection fund. >rievances redressal. Bisciplinary actions. !ndices. Bisclosures and listing norms. %omputerized trading. Cuture developments. 0ationa) Stoc# E$chan%. !ntroduction. Eocations. Eisting. %onstitution. "rading members. "rading mechanism. ?arket types. Order books. Order matching rules. Order conditions. Suantity conditions. "rading workstation. %omputer to computer links facility. $ational Securities %learing %orporation Eimited. .adla trading. Substitutes for .adla. Cinancial derivatives. "rading options. .ibliography. +10+-USI101