CASE STUDY ON “NATIONAL STOCK EXCHANGE” (NSE)
The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time consuming and inefficient. This imposed limits on trading volumes and efficiency.
In order to provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully-automated screen based trading system (SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds a matching sale or buy order from a counter party.
SBTS electronically matches orders on a strict price/time priority and hence cuts down on time, cost and risk of error, as well as on fraud resulting in improved operational efficiency.
It allows faster incorporation of price sensitive information into prevailing prices, thus increasing the informational efficiency of markets. It enables market participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market. It provides full anonymity by accepting orders, big or small, from members without revealing their identity, thus providing equal access to everybody. It also provides a perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety. Today India can boast that almost 100% trading take place through electronic order matching.
Technology was used to carry the trading platform from the trading hall of stock exchanges to the premises of brokers. This made a huge difference in terms of equal access to investors in a geographically vast country like India.
TRADING NETWORK
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/leased lines/modems. An investor informs a 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/leased line/modem. The signal is directed to mainframe computer at NSE via VSAT at NSE's office. A message relating to the order activity is broadcast to the respective member.
The order confirmation message is immediately displayed on the PC of the broker. This order matches with the existing passive order(s), otherwise it waits for the active orders to enter the system.
On order matching, a message is broadcast to the respective member.The trading system operates on a strict price time priority. All orders received on the system are sorted with the best priced order getting the first priority for matching i.e., the best buy orders match with the best sell order.
Similar priced orders are sorted on time priority basis, i.e. the one that came in early gets priority over the later one. The computer keeping the system transparent, objective and fair matches orders automatically. Where an order does not find a match, it remains in the system and is displayed to the whole market, till a fresh order comes in or the earlier order is cancelled or modified.
The trading system provides tremendous flexibility to the users in terms of kinds of orders that can be placed on the system. Several time-related (good till cancelled, good till day, immediate or cancel), price-related (buy/sell limit and stop loss orders) or volume related (all or none, minimum fill, etc) conditions can be easily built into an order.
The trading system also provides complete market information on-line. The market screens at any point of time provide complete information on total order depth in a security, the five best buys and sells available in the market, the quantity traded during the day in that security, the high and the low, the last traded price, etc. Investors can also know the fate of the orders almost as soon as they are placed with the trading members.
Thus the NEAT system provides an Open Electronic Consolidated Limit Order Book (OECLOB). Limit orders are orders to buy or sell shares at a stated quantity and stated price. If the price quantity conditions do not match, the limit order will not be executed.
The term “limit order book” refers to the fact that only limit orders are stored in the book and all market orders are crossed against the limit orders sitting in the book. Since the order book is visible to all market participants, it is termed as an ‘Open Book’.
NEAT SYSTEM
The NEAT system supports an order driven market, wherein orders match on the basis of time and price priority.
All quantity fields are in units and prices are quoted in Indian Rupees. The regular lot size and tick size for various securities traded is notified by the Exchange from time to time.
Some points which I have noted with respect to Indian Equity market:
(a) The absence of a clear relationship between the cost of carry on the index futures market and normal interest rate levels in the economy;
(b) Lack of knowledge on the part of traditional market arbitrageurs about derivative trading strategies, especially in arbitraging across the spot, futures and options markets;
(c) Indian mutual funds not yet having figured out how to undertake reverse cash and carry arbitrage (i.e. stock repos);
(d) Unusually low futures prices on the index derivatives market accompanied by reasonably priced options prices;
(e) The unusual arbitrage opportunities that arise at dividend declaration time;
(f) The large pricing anomalies that persist between BSE/NSE prices and ADR/GDR prices for the same underlying shares because of the absence of convertibility and fungibility;
(g) The impact of the absence of hedge funds; and
(h) Imperfect understanding on the part of operators and regulators of the key individual risks that arbitrageurs are exposed to and the capital intensity of arbitrage.
Indian Capital Markets Still Do Not Have:
(a) A single interface for dealing in both spot and derivatives markets thus compounding inefficiency in executing simultaneous trading strategies (e.g. stock purchases accompanied by sales of covered calls and puts);
(b) Essential analytical tools for supporting trading decisions;
(c) Adequate systems for monitoring client positions, margin requirements and risk exposure in real time;
(d) Adequate decision support tools for risk management, funds transfer and collateral checking;
(e) Proper back office control and containment systems with instantly traceable electronic and paper trails;
(f) Standard messaging interfaces across intermediaries; or The ability to handle sudden peak loads in trading volumes without the risk of systems crashing through transaction processing overload.
WHY SHOULD ONE INVEST ?
One needs to invest to:
earn return on your idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future
RECOMMENDATION :
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future.
I would hereby recommend that people who are willing to take risks as well as have the capacity to suffer the losses caused in capital markets should invest in such markets.
Markets are very Volatile.
So , “Think before you Leap”.
The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time consuming and inefficient. This imposed limits on trading volumes and efficiency.
In order to provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully-automated screen based trading system (SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds a matching sale or buy order from a counter party.
SBTS electronically matches orders on a strict price/time priority and hence cuts down on time, cost and risk of error, as well as on fraud resulting in improved operational efficiency.
It allows faster incorporation of price sensitive information into prevailing prices, thus increasing the informational efficiency of markets. It enables market participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market. It provides full anonymity by accepting orders, big or small, from members without revealing their identity, thus providing equal access to everybody. It also provides a perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety. Today India can boast that almost 100% trading take place through electronic order matching.
Technology was used to carry the trading platform from the trading hall of stock exchanges to the premises of brokers. This made a huge difference in terms of equal access to investors in a geographically vast country like India.
TRADING NETWORK
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/leased lines/modems. An investor informs a 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/leased line/modem. The signal is directed to mainframe computer at NSE via VSAT at NSE's office. A message relating to the order activity is broadcast to the respective member.
The order confirmation message is immediately displayed on the PC of the broker. This order matches with the existing passive order(s), otherwise it waits for the active orders to enter the system.
On order matching, a message is broadcast to the respective member.The trading system operates on a strict price time priority. All orders received on the system are sorted with the best priced order getting the first priority for matching i.e., the best buy orders match with the best sell order.
Similar priced orders are sorted on time priority basis, i.e. the one that came in early gets priority over the later one. The computer keeping the system transparent, objective and fair matches orders automatically. Where an order does not find a match, it remains in the system and is displayed to the whole market, till a fresh order comes in or the earlier order is cancelled or modified.
The trading system provides tremendous flexibility to the users in terms of kinds of orders that can be placed on the system. Several time-related (good till cancelled, good till day, immediate or cancel), price-related (buy/sell limit and stop loss orders) or volume related (all or none, minimum fill, etc) conditions can be easily built into an order.
The trading system also provides complete market information on-line. The market screens at any point of time provide complete information on total order depth in a security, the five best buys and sells available in the market, the quantity traded during the day in that security, the high and the low, the last traded price, etc. Investors can also know the fate of the orders almost as soon as they are placed with the trading members.
Thus the NEAT system provides an Open Electronic Consolidated Limit Order Book (OECLOB). Limit orders are orders to buy or sell shares at a stated quantity and stated price. If the price quantity conditions do not match, the limit order will not be executed.
The term “limit order book” refers to the fact that only limit orders are stored in the book and all market orders are crossed against the limit orders sitting in the book. Since the order book is visible to all market participants, it is termed as an ‘Open Book’.
NEAT SYSTEM
The NEAT system supports an order driven market, wherein orders match on the basis of time and price priority.
All quantity fields are in units and prices are quoted in Indian Rupees. The regular lot size and tick size for various securities traded is notified by the Exchange from time to time.
Some points which I have noted with respect to Indian Equity market:
(a) The absence of a clear relationship between the cost of carry on the index futures market and normal interest rate levels in the economy;
(b) Lack of knowledge on the part of traditional market arbitrageurs about derivative trading strategies, especially in arbitraging across the spot, futures and options markets;
(c) Indian mutual funds not yet having figured out how to undertake reverse cash and carry arbitrage (i.e. stock repos);
(d) Unusually low futures prices on the index derivatives market accompanied by reasonably priced options prices;
(e) The unusual arbitrage opportunities that arise at dividend declaration time;
(f) The large pricing anomalies that persist between BSE/NSE prices and ADR/GDR prices for the same underlying shares because of the absence of convertibility and fungibility;
(g) The impact of the absence of hedge funds; and
(h) Imperfect understanding on the part of operators and regulators of the key individual risks that arbitrageurs are exposed to and the capital intensity of arbitrage.
Indian Capital Markets Still Do Not Have:
(a) A single interface for dealing in both spot and derivatives markets thus compounding inefficiency in executing simultaneous trading strategies (e.g. stock purchases accompanied by sales of covered calls and puts);
(b) Essential analytical tools for supporting trading decisions;
(c) Adequate systems for monitoring client positions, margin requirements and risk exposure in real time;
(d) Adequate decision support tools for risk management, funds transfer and collateral checking;
(e) Proper back office control and containment systems with instantly traceable electronic and paper trails;
(f) Standard messaging interfaces across intermediaries; or The ability to handle sudden peak loads in trading volumes without the risk of systems crashing through transaction processing overload.
WHY SHOULD ONE INVEST ?
One needs to invest to:
earn return on your idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future
RECOMMENDATION :
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future.
I would hereby recommend that people who are willing to take risks as well as have the capacity to suffer the losses caused in capital markets should invest in such markets.
Markets are very Volatile.
So , “Think before you Leap”.