Iapm Group Project

8/8/2019 Iapm Group Project

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TRADING AND SETTLEMENTMECHANISM AT STOCK

EXCHANGES IN INDIA, INDICES

CONSTRUCTION

GROUP - 9

Abhay Goenka

Mitesh Saini

Prashant SinghRahul Gupta

Shalove Chaudhary

Sanjeet Singh

Saurav Kumar


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HOW ARE STOCKS TRADED IN STOCK

EXCHANGES?

Investors who wish to trade have to channel theirtrade at exchanges through a stockbroker who isa member of that exchange.

Stock exchanges have Corporate membershipgiven out for brokerage services.

Specific criterion for a broker-ship net-worth,education, experience of promoters, track recordetc.

Brokers maintain a suitable security depositalong with annual membership fees.

Brokers act as agents to trade in securities (for acommission), may also act on their own accountand risk.


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HOW ARE STOCKS TRADED IN STOCK

EXCHANGES?

De-materialised shares came in 1993. Also

earlier practice was that of Open Outcry System,

which is now replaced by Electronic Trading.

Trading hours for stock 9.00 am to 3.30 pm. BSE & NSE offer fully computerised screen

based trading: BOLT (BSEs On line Trading

system), NEAT (National Exchange for

Automated Trading). Both system uses V-Sat.


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TERMINOLOGIES:

Open position implies a bought or sold position

Trade, Settlement, Bid, Ask (Offer), Tick size,

Bid-Ask Spread

Cash Market- buy shares if one has adequatemoney or sell if one owns the stock.

1. Delivery based- delivery of share certificates and

the payment for the purchase is made before the

settlement date.2. Non-Delivery based- Day trading

Margin trading buying of shares possible

without having required money, or sell shares

without owning them


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MARGIN TRADING

One can buy shares by paying only a part of the totalvalue of the shares as margin, while the rest isfinanced by the broker. Example: For a marginamount of Rs. 100000 one can borrow another Rs.

100000 (50 % margin) from the broker at an interestof say 1 percent for every two days, (the brokerhimself borrows from banks or RBI registered NBFC)

One can also borrow stocks from the broker for a feeand sell it = SHORT SELLING.

SEBI stipulates that only Corporate Brokers with anet worth of more than Rs. 30 million or may carryout margin trading on behalf of their clients.

Daily margin, ad hoc margin, special margin,volatility margin, carry forward margin, etc.


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MAINTENANCE MARGIN WITH DECREASE IN

MARKET VALUE FOR A LONG POSITION ON DAY

T+1

Margin available on account of

Initial Margin

35% of Rs. 50 x

200 shares

Rs. 3500

Loss arising due to decline in share

price

(Rs. 50 37.50) x

200 shares

Rs. 2500

Effective available margin Rs. 1000

Required margin (35% of worth) 0.35 x Rs. 37.50 x

200 shares

Rs. 2625

Additional margin required/ margin

call amount

Rs. (2625 1000)

= Rs. 1625

Margin available after the margin call Rs. 2625


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MAINTENANCE MARGIN WITH INCREASE IN

MARKET VALUE FOR A LONG POSITION ON DAY

T+2

Margin available Rs. 2625

Gain due to increase in

share price

(Rs. 42.5 Rs. 37.5) x

200 shares

Rs. 1000

Effective available

margin

Rs. 3625

Required margin 0.35 x 42.5 x 200 shares Rs. 2975

Excess margin the

investor can withdraw

Rs. (3625 2975)

= Rs. 650

Margin available after

withdrawal

Rs. 2975


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MAINTENANCE MARGIN WITH INCREASE IN

MARKET VALUE OF SHORT POSITION ON DAY

T+1

Margin available Rs. 7875

Loss arising due to

increase in share price

(Rs. 250- Rs. 225) x 100

shares

Rs. 2500

Effective available

margin

Rs. ( 7875 2500)

= Rs. 5375

Required margin (35%) 0.35 x Rs. 250 x 100

shares

Rs. 8750

Additional margin

required/ margin call

amount

Rs. 3375


the margin call

Rs. 8750


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MAINTENANCE MARGIN WITH DECREASE IN

MARKET VALUE FOR A SHORT POSITION OF DAY

T+2

Margin available 0.35 x Rs. 250 x 100

shares

Rs. 8750

Gain due to decrease in

share price

Rs. (250 220) shares Rs. 3000

Effective available

margin

Rs. (8750 + 3000)

= Rs. 11750

Required margin 0.35 x Rs. 220 x 100 Rs. 7700

Excess margin the

investor can withdraw

Rs. 4050


withdrawal

Rs. 7700


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IMPORTANCE OF MARGIN TRADING

In its present form addresses some of the ills of

old Badla system.

Enables investors to trade in greater volumes

provides liquidity to the securities It provides more competitive trades.

Helps generate very active secondary market.


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SETTLEMENT

Settlement is the process that involves transfer

of money from the buyer to the seller and the

transfer of securities from the seller to the buyer

on the settlement date.

Rolling settlement a settlement mechanism

where the trades completed on a particular day

are settled after a given number of days. T+2


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GROSS BASIS OR NET BASIS OF SETTLEMENT

Transaction

on Monday

Sale

value

Purchase

value

Settlement on

Wednesday

pay-in of

exchange

Pay-out of

stock

exchange

Sold 40 shares

of xyz ltd. at Rs.

235.75

Rs. 9430

Bought 75

shares of xyz

ltd. at Rs. 231.

Rs. 17325

Gross Basis 40 shares of xyzand

Rs. 7895

75 shares ofxyz ltd

Net basis Rs. 7895 35 Shares of

xyz ltd.


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PROCESS

If the shares are held in Demat form, the settlement

will take place on a net basis since the buy and sell

positions are in the same script. By Wednesday 11.00

am, the pay in of Rs. 7895 is required and at 3.30 pm

on the same day, the stock exchange will pay out 35shares of xyz ltd to the broker in favour of the client.

When the broker receives the shares from the

exchange he may update the clients demat account

accordingly, or if the delivery is in physical form, send

it to the Registrar and Transfer Agent of the company

for effecting a change in ownership. In case of de-

materialised or de-matted trades, these changes are

also reflected in the electronic databases maintained

by the NSDL & CDSL.


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CIRCUIT BREAKERS

Circuit breakers or Trading Halts are imposed by

stock exchanges to limit trading in wildly volatile

shares. It halts the trading when the price

fluctuates beyond a certain range otherwise

market may get overheated in either direction,

and may result in potential havoc.

Circuit breakers available on Individual stocks

(filters) or Market- wide (index-linked circuit

breakers)

SEBI mandates not only the circuit breakers for

indices but also the duration of the trading halt.


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INDEX WIDE CIRCUIT LIMIT

Applies at 3 stages of the index movement, either way viz. at 10%, 15% and

20%. Brings a coordinated trading halt in all equity and equity derivativemarkets nationwide. The market-wide circuit breakers are triggered bymovement of either the BSE Sensex or the NSE S&P CNX Nifty, whichever isbreached earlier.

For10% movement of either of these indices - a one-hour market halt if before1:00 p.m.

In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m. -trading halt for hour.

In case movement takes place at or after 2:30 p.m. - no trading halt at the 10%level and market shall continue trading.

If market hits 10% before 1 p.m. then as explained there would be a one hourhalt in trading and after resumption of trade in case if the market hits 15% ineither index, then there shall be a two-hour halt.

If the 15% trigger is reached on or after 1:00p.m. but before 2:00 p.m., - a one-hour halt.

If the 15% trigger is reached on or after 2:00 p.m. the trading shall halt for theremaining part of the day.

If the market fails to resume at 10% then the next limit is placed at 15% andfinally at 20%.

In case if market fails to resume from 15% and if it hits 20% irrespective of thetime, the trading shall be halt for remaining part of the day.


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STOCK WISE CIRCUIT LIMITS AND THEIR

IMPORTANCE

Both NSE and BSE have implemented the circuit limit systemon the stocks. They have applied the stock wise circuit limitsystem at four levels i.e. 2%, 5%, 10% and 20%.

Circuit limits like any other concept have both pros and cons.On the positive side, with the presence of circuit filters, the

traders/investors fear of erosion of wealth is not rapid whencompared to not having circuit limits. However, it may not betrue with in all the cases. Many times, the stock might see arise due to announcement of any corporate action. In that case,the rise of stock beyond a limit might be genuine but still, dueto application of this limit the trading in stock is held.

The need for circuit-filters can be questioned on severalgrounds. For instance, empirical evidence on the effectivenessof price limits, circuit-breakers and trading halts isambiguous. But in the case of specific situations where it isclear that the equilibrium value of the asset will change, thenit makes no sense to have circuit breakers.


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OTHER MEASURES TO CURB SPECULATION

Trade to trade segment where no day trading isallowed.

Discipline on Companys Insiders as to how todisseminate information (use of EDIFAR-

electronic data and information filling system),discipline imposed for personal transactions byinsiders.

Imposing higher margins than usually permitted.

Use of MAPIN (Market participant and investordatabase) to trace the trades ahead of anypublic announcement of activities relating to acompany and check if they can be connected toany insider.


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TYPES OF ORDER:

Three categories of Order:

1. Time Related Conditions Day order, Good Till

Cancelled (GTC), Good till Date (GTD),

Immediate Or Cancel (IOC)2. Price Related Condition Limit (Ceiling or

Floor), Market and Stop- Loss Order (Trigger

price & Limit Price).


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GROUPING OF SHARES AND DEBENTURES

Category Nature of security Specific nature

A Ordinary shares of companies with large

capital base, shareholder base, high

volume, high dividends and good growth

record

Margin trading and

day trading is

allowed

B1 Ordinary shares of companies having lessliquidity

Cash trading & daytrading only

B2 Ordinary shares other than A & B1 Cash trading only

C Physical shares of A, B1, B2 Delivery based only

T Those under watch by BSE surveillance

committee

Delivery based only

Z Ordinary shares not conforming to certain

requirement

Delivery based only


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INDICES

Index is a number that helps to measure the

movement of the market against a benchmark

index, taken as 100, on a base year.

Sensex and Nifty are calculated using Marketcapitalization method. Every index is associated

with a base year. Base date for Sensex is 1stApril

1979, and for Nifty is 1stApril 1995. however

sensex came into existence only on 1st January

1986 when its value was computed at 598.53.


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INDEX MAINTENANCE:

Index maintenance: Base market capitalization needsto be adjusted for issue of bonus and rights issues.

New base market capitalization =

Old base market capitalization X

New market capitalization

Old market capitalization

Adjustments for Rights Issues

Adjustments for Bonus Issue

Other IssuesBase Market capitalization Adjustment is alsorequired when new shares are issued by way ofconversion of debentures, mergers, spin-offs etc. orwhen equity is reduced by way of buy-back of shares,corporate restructuring etc


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Iapm Group Project

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