STOCK EXCHANGES

To discuss

Stock Exchanges Architecture Stock Broking services Depository services Custodial services

Stock Exchanges

What are they Characteristics of a good market History Trading Settlement Regulation

What is a Stock Exchange?

The word Stock means a fraction of the capital of a company and the word Exchange means a place for buying and selling some thing.
Hence stock exchange is a place or institution facilitating buying and selling of fraction ownership of companies.

Definition of Stock Exchange

The Securities Contracts (Regulation) Act, 1956 defines stock exchange as: an association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities

Functions of Stock Exchanges

Ensure increased liquidity and ready market for the securities. Mobilization of surplus funds of individuals and business firms for investment in securities. Determining the fair price of various securities. Ensure fair dealings and safety of funds because of strict regulations on the working of SEs. Listed companies have to follow the rules framed by the SEs. Act as a barometer of the business conditions in the country.

Characteristics of a good Market

Availability of Information regarding volume, prices of previous transactions, current bids & offers Liquidity ability to buy/sell an asset at a known price that does not substantially differ from previous transactions Depth - Numerous potential buyers & sellers at various prices Low Transaction costs - margins, brokerage costs, depository charges Informational Efficiency -Participants want prices to adjust to information quickly Well regulated

Evolution of Stock Markets in India

The Native Share and Stock Brokers Association, 1875 (Bombay Stock Exchange) Ahmedabad Share and Stock Brokers Association, 1894 Calcutta Stock Exchange in 1908 Securities Contract (Regulation) Act, 1956 SEBI Act, 1992 NSE, 1993 United Stock Exchange, 2011 MCX Stock Exchange, 2012 Securities Contract (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012

Stock Exchanges in India

Sr. No. Name of the Exchange 1 2 3 4 Ahmedabad Stock Exchange Ltd. BSE Ltd. Bangalore Stock Exchange Ltd. Bhubaneswar Stock Exchange Ltd Calcutta Stock Exchange Ltd. Cochin Stock Exchange Ltd Delhi Stock Exchange Ltd.,The Gauhati Stock Exchange Ltd.,The Inter-Connected Stock Exchange of India Limited Jaipur Stock Exchange Ltd Ludhiana Stock Exchange Ltd.,The Valid Upto PERMANENT PERMANENT PERMANENT 04-JUN-2013

5
6 7 8 9 10 11

PERMANENT
07-NOV-2013 PERMANENT 30-APR-2013 17-NOV-2013 08-JAN-2014 27-APR-2014

12 13 14 15 16 17 18 19

MCX SX Exchange Limited Madhya Pradesh Stock Exchange Ltd

15-SEP-2013 PERMANENT PERMANENT PERMANENT 22-AUG-2013 01-SEP-2013 03-JAN-2014 02-JUN-2013

Madras Stock Exchange Ltd.

National Stock Exchange of India Ltd. OTC Exchange of India Pune Stock Exchange Ltd. The Vadodara Stock Exchange Ltd. U.P. Stock Exchange Limited United Stock Exchange of India Limited

20

21-MAR-2014

Not recognized any longer: Magadh, Mangalore, Hyderabad, Coimbatore, Saurashtra Kutch
Source: SEBI

Development of Securities Markets in India

Freedom in designing and pricing instruments of financing

Badla system banned

Screen Based Trading in all the Stock Exchanges

Change in management structure corporatisation and

demutualisation
(OWNERSHIP, MANAGEMENT and TRADING RIGHTS are segregated

from one another)

Registration & Regulation of Intermediaries

Development of Securities Markets in India

Redressal of Investor grievances

Regulation of mutual funds and Foreign Portfolio Investment

Introduction of rolling settlement (T+2 now)

Introduction of equity derivatives trading

Introduction of Stock Lending and Borrowing Scheme Introduction of exchange traded currency futures, interest rate futures

Trading System

Open outcry system in the Stock Exchanges without the use of technology till NSE started trading in 1994 NSE introduced Screen Based Trading System in1994 (NEAT). In 1995, BSE introduced BOLT. On line fully automated screen based trading system.

Trading System

Price/time priority

This system follows open Electronic Consolidated Limit Order Book Market System. The key features are:

One can place limit orders or market price orders Computer keeps on matching mutually compatible orders on price and time priority. First price, then time. The limit order book i.e. the list of unmatched limit order is there on the screen for everybody to see.

Trading

Monday to Friday Trading time 9:15am to 3:30pm on NSE Info about trades: open, high, low, close prices; volume; number of trades; Opening price discovered in the pre-open session Closing price at NSE, weighted average of last half hour of trades

Clearing

Clearing corporation NSCCL (NSE) Novation act or replacing one participating member of a contract with another CC buys from seller; buyer buys from CC Counterparty guarantee CC protects itself using margins

Settlement

Buyer gets the securities/shares and the seller gets the money. System followed previously : physical delivery. Now : electronic transfer of shares with the help of depositories

Settlement

The Depositories Act, 1996 National Securities Depository Ltd (NSDL) CDSL (Central Depositories Services Ltd.) Under NSDL and CDSL, there are depository participants (DPs) T + 2 settlement, pay-in and pay-out Rolling Settlement NSCCL (NSE)

Rolling Settlement

Activity Trading Rolling Settlement Trading Clearing Custodial Confirmation Settlement Securities and Funds pay in Securities and Funds pay out Post Settlement Auction Auction settlement

Day T T+1 working days T+2 working days T+2 working days T+2 working days T+3 working days

Funds Shortages
Trading and/or clearing facility of members failing to fulfill their funds obligations shall be withdrawn.

Securities pay-out, due to such clearing member shall also be withheld. And, the member will be required to pay a penal charge of 0.07% per day on the amount outstanding at the end of the day, till the amount is recovered.

Securities shortages

The members are debited by an amount equivalent to the securities not delivered and valued at a valuation price (closing price of such securities on the immediate trading day preceding the pay-in day). This is known as valuation debit.

For all such short deliveries NSCCL conducts a buying-in auction on the T+2 day, after completion of the pay-out, through the NSE trading system.
If the buy-in auction price is more than the valuation price, the CM is required to make good the difference.

Risk Containment Measures

(at NSE for Clearing Member)

Capital Adequacy requirements (for corporates) :

NSE prescribes a minimum net worth of Rs. 1 crore cash deposit of 85 lakhs for NSEIL Cash deposit of 15 lakhs and non cash deposit of 25 lakhs for NSCCL

On line exposure monitoring a flash on the screen is there if the exposure reaches certain levels (in %).

Risk Containment Measures (at NSE)

Daily Margins in Cash Market Segment

Value

at Risk (VaR) margin Extreme Loss Margin Mark To Market Margin

Margin

requirements Payable on T+1

VaR Margin
For levy of VaR margin, companies are divided into 3 categories based on how regularly they are traded and on the basis of liquidity.

Liquidity is gauged by what is technically called the IMPACT COST.

VaR Margin- Scrips divided into 3 groups

Group 1

Consist of shares that are traded on more than 80% of the trading days in the previous 6 months and have an impact cost of less than 1.00%. For Group 1 shares VaR margin shall be higher of 3.5 times volatility or 7.50%, whichever is higher.

Group 2 and 3 scrips

Group 2 consists of shares that are traded on more than 80% of the trading days in the previous 6 months and have an impact cost of more than 1.00%.
All other shares are classified under Group 3

Extreme Loss Margin

Extreme Loss Margins aim at covering the losses that could occur outside the coverage of VaR margin. The extreme loss margin for any stock is the higher of:
1.5 times the standard deviation of the daily logarithmic returns of the stock price in the last 6 months or 5 % of the value of the position.

Mark To Market (MTM) Margin

MTM is calculated at the end of the day on all open positions by comparing the transaction price with closing price of the share for the day.
MTM Profit or Loss = { (Total Buy Qty x Closing Price) Total Buy Value} PLUS {Total Sales Value (Total Sales Qty x Closing Price)} Excel calculation

Index based Market wide circuit filter

Used to stop adverse movements either way Would be triggered by movement of either BSE Sensex or the NSE S&P CNX Nifty whichever is breached earlier.

In case of a 10% movement of either of these indices, there would be a 1 hour market halt if the movement takes place before 1 pm. In case the movement takes place at or after 1 pm but before 2:30 pm there will be a trading halt for hour. In case the movement takes place at or after 2:30 pm there will be no trading halt at the 10% level and the market will continue trading. In case of a 15% movement of either index, there will be a 2 hour halt if the movement takes place before 1 pm. If the 15% trigger is reached on or after 1 pm but before 2 pm, there will be a 1 hour halt. If the 15% trigger is reached on or after 2 pm the trading will halt for the remainder of the day. In case of a 20% movement of the index, the trading will be halted for the remainder of the day.

Scrip wise price bands

Dynamic price bands at 10% of the previous closing price for the following securities:
Stocks on which derivatives products are available, Index futures Stock futures

Further, in the event of a market trend in either direction, the dynamic price bands shall be relaxed by the stock exchanges in increments of 5%. For the rest, individual scrip wise price bands of 20% either way

Revenue of Stock Exchanges

Transaction charges range of Rs 2 to 3.5 per lakh Listing fees Initial Rs 50,000 followed by annual fees (starts from 18000) Annual subscription Rs 1 lakh per member (corporates) Others like
Interest

income Investment income

Income and Profit of NSE & BSE

EXCHANGE BSE INCOME 12-13 INCOME 11-12 NET PROFIT 12-13 552.8 578.42 108.57 NET PROFIT 11-12 178.13

NSE
FIGURES IN CRORES

1000.84

1069.91

877.61

704.89

Our share in world M-cap

NSEs market cap stands at USD 1.15 trillion (May 2013) World market cap stands at USD 58.58 trillion

% share: 1.96%
Data Source: World Federation of Exchanges

NSE growth of CM segment

Regulation of Stock Markets

The Capital Issues ( Control) Act, 1947 (repealed in 1992) Securities Contract (Regulation) Act, 1956 Formation of SEBI in 1988 Abolition of CCI in 1992 and The SEBI Act, 1992 Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporation) Regulations, 2012

Regulation of Stock Markets

Objectives of SEBI
To

PROTECT the interest of the investors in securities To PROMOTE the development of securities market in India To REGULATE the securities market

Regulation of Stock Markets

Functions of SEBI
Regulating

the securities market Recognition and regulation of stock exchanges Registering and regulating intermediaries Registering and regulating functioning of depositories, DPs and custodians Registering FIIs Registering and regulating functioning of VCFs, PMs, MFs, etc.

Regulation of Stock Markets

Functions of SEBI
Promotion

and regulation of SROs Prohibiting fraudulent and unfair trade practices Prohibiting insider trading Regulating M & A activities Promoting investor education and training of intermediaries Conducting research related to securities market Perform the functions and exercise powers of GoI under SCRA, 1956

Regulation of Stock Markets

Powers of SEBI
Discovery

and production of books of accounts and other related documents Summoning, examining and enforcing attendance of persons/representatives Inspections of books, registers and other documents of intermediaries and listed companies

Regulation of Stock Markets

SROs Self Regulatory Organization

A non-governmental organization that has the power to create and enforce industry regulations and standards. The priority is to protect investors through the establishment of rules that promote ethics and equality. Purpose behind emergence of SROs Examples of SROs NSE, BSE, AMFI, AIBI, etc

Sebi planning to set up an independent SRO

For

regulation of trading members Listing and market surveillance to remain with exchanges

Regulation of Stock Markets

International Organization of Securities Commissions

Headquartered

in Spain association of organisations that regulate the worlds securities markets members from over 100 different countries Role:
to

assist its members to promote high standards of regulation and act as a forum for national regulators to cooperate with each other and other international organisations