TRADING AND SETTLEMENT

MECHANISM AT STOCK
EXCHANGES IN INDIA, INDICES
CONSTRUCTION

GROUP - 9
Abhay Goenka
Mitesh Saini
Prashant Singh
Rahul Gupta
Shalove Chaudhary
Sanjeet Singh
Saurav Kumar
HOW ARE STOCKS TRADED IN STOCK
EXCHANGES?
 Investors who wish to trade have to channel their trade at
exchanges through a stockbroker who is a member of
that exchange.
 Stock exchanges have Corporate membership given out
for brokerage services.
 Specific criterion for a broker-ship – net-worth,
education, experience of promoters, track record etc.
 Brokers maintain a suitable security deposit along with
annual membership fees.
 Brokers act as agents to trade in securities (for a
commission), may also act on their own account and
risk.
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 (BSE’s On line Trading system), NEAT
(National Exchange for Automated Trading). Both
system uses V-Sat.
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 adequate money 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
MARGIN TRADING
 One can buy shares by paying only a part of the total value of
the shares as margin, while the rest is financed by the broker.
Example: For a margin amount of Rs. 100000 one can
borrow another Rs. 100000 (50 % margin) from the broker at
an interest of say 1 percent for every two days, (the broker
himself borrows from banks or RBI registered NBFC)
 One can also borrow stocks from the broker for a fee and sell
it = SHORT SELLING.
 SEBI stipulates that only Corporate Brokers with a net worth
of more than Rs. 30 million or may carry out margin trading
on behalf of their clients.
 Daily margin, ad hoc margin, special margin, volatility
margin, carry forward margin, etc.
 MAINTENANCE MARGIN WITH DECREASE IN
MARKET VALUE FOR A LONG POSITION ON DAY T+1
Margin available on account of Initial 35% of Rs. 50 x Rs. 3500
Margin 200 shares

Loss arising due to decline in share price (Rs. 50 – 37.50) x Rs. 2500
200 shares

Effective available margin Rs. 1000

Required margin (35% of worth) 0.35 x Rs. 37.50 x Rs. 2625

200 shares

Additional margin required/ margin call Rs. (2625 –1000)

amount = Rs. 1625

Margin available after the margin call Rs. 2625

MAINTENANCE MARGIN WITH INCREASE IN
MARKET VALUE FOR A LONG POSITION ON DAY
T+2
Margin available Rs. 2625

Gain due to increase in (Rs. 42.5 – Rs. 37.5) x 200 Rs. 1000
share price shares

Effective available margin Rs. 3625

Required margin 0.35 x 42.5 x 200 shares Rs. 2975

Excess margin the investor Rs. (3625 – 2975)

can withdraw = Rs. 650

Margin available after Rs. 2975

withdrawal
MAINTENANCE MARGIN WITH INCREASE IN
MARKET VALUE OF SHORT POSITION ON DAY
T+1
Margin available Rs. 7875

Loss arising due to increase (Rs. 250- Rs. 225) x 100 Rs. 2500
in share price shares

Effective available margin Rs. ( 7875 – 2500)

= Rs. 5375
Required margin (35%) 0.35 x Rs. 250 x 100 shares Rs. 8750

Additional margin required/ Rs. 3375

margin call amount

Margin available after the Rs. 8750

margin call
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 Rs. (250 – 220) shares Rs. 3000

share price

Effective available margin Rs. (8750 + 3000)

= Rs. 11750

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

Excess margin the investor Rs. 4050

can withdraw

Margin available after Rs. 7700

withdrawal
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.

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
GROSS BASIS OR NET BASIS OF SETTLEMENT
Transaction on Sale value Purchase Settlement on Pay-out of
Monday value Wednesday pay- stock
in of exchange exchange
Sold 40 shares of Rs. 9430
xyz ltd. at Rs.
235.75
Bought 75 shares Rs. 17325
of xyz ltd. at Rs.
231.
Gross Basis 40 shares of xyz 75 shares of
and xyz ltd
Rs. 7895
Net basis Rs. 7895 35 Shares of
xyz ltd.
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 35 shares of xyz ltd
to the broker in favour of the client.
 When the broker receives the shares from the exchange
he may update the client’s 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.
PROCESS
 In reality the receive and giving out of securities is done
by the clearing houses associated with the exchanges.
NSCCL and BOISL are the clearing houses for NSE and
BSE respectively. The role of clearing houses is to
assume the counter-party risk for each broker and
guarantee financial settlement.
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.
 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 derivative markets nationwide. The market-
wide circuit breakers are triggered by movement of either the BSE Sensex or the NSE S&P
CNX Nifty, whichever is breached earlier.
 For10% movement of either of these indices - a one-hour market halt if before 1:00 p.m.

 In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m. - trading halt for
½ 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 hour halt in
trading and after resumption of trade in case if the market hits 15% in either 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 the remaining
part of the day.
 If the market fails to resume at 10% then the next limit is placed at 15% and finally at 20%.

 In case if market fails to resume from 15% and if it hits 20% irrespective of the time, the
trading shall be halt for remaining part of the day.
 STOCK WISE CIRCUIT LIMITS AND
THEIR IMPORTANCE
 Both NSE and BSE have implemented the circuit limit system on the stocks.
They have applied the stock wise circuit limit system 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 when compared to not having circuit limits. However, it
may not be true with in all the cases. Many times, the stock might see a rise due
to announcement of any corporate action. In that case, the rise of stock beyond
a limit might be genuine but still, due to application of this limit the trading in
stock is held.
 The need for circuit-filters can be questioned on several grounds. For instance,
empirical evidence on the effectiveness of price limits, circuit-breakers and
trading halts is ambiguous. But in the case of specific situations where it is
clear that the equilibrium value of the asset will change, then it makes no sense
to have circuit breakers.
OTHER MEASURES TO CURB
SPECULATION
 Trade to trade segment – where no day trading is
allowed.
 Discipline on Company’s Insiders – as to how to
disseminate information (use of EDIFAR- electronic data
and information filling system), discipline imposed for
personal transactions by insiders.
 Imposing higher margins than usually permitted.

 Use of MAPIN (Market participant and investor

database) – to trace the trades ahead of any public
announcement of activities relating to a company and
check if they can be connected to any insider.
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).
GROUPING OF SHARES AND
DEBENTURES
Category Nature of security Specific nature

A Ordinary shares of companies with large capital Margin trading and

base, shareholder base, high volume, high day trading is allowed
dividends and good growth record

B1 Ordinary shares of companies having less Cash trading & day

liquidity trading 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 Delivery based only

committee

Z Ordinary shares not conforming to certain Delivery based only

requirement
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 Market
capitalization method. Every index is associated with a
base year. Base date for Sensex is 1st April 1979, and for
Nifty is 1st April 1995. however sensex came into
existence only on 1st January 1986 when its value was
computed at 598.53.
CALCULATION OF INDEX
 Calculate the market capitalization of each individual company
comprising the index. Market Capitalization are usually in terms of
freely floating shares. All major index providers like MSCI, FTSE,
STOXX, S&P and Dow Jones use the free-float methodology.
 Calculate the total market capitalization by adding the individual
market cap.
 Compute the index for the next day as per the formula:

Index value today = Index on previous day X

Total market cap. for current day
Total market cap. of previous day
 A variation of above method is Price weighted method where
instead of M- Cap we can use price of individual stocks to represent
weights of stocks.
INDEX MAINTENANCE:
 Index maintenance: Base market capitalization needs to 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 Issues
Base Market capitalization Adjustment is also required when
new shares are issued by way of conversion of debentures,
mergers, spin-offs etc. or when equity is reduced by way of
buy-back of shares, corporate restructuring etc
THANK YOU