Unit-4

Trading , clearing and

settlement
 Contents
Chapter-1 Trading Member and Membership .

Chapter II- Trading system ( Neat System - Wireless Application

Protocol (Wap) and Computer to Computer Link (Ctcl) Facility,
Steps in Stock Trading - Order Management - Trade Management -
Block Trading - Jobbers vs. Brokers - Internet Broking/ e-Broking )

Chapter III- Stock Exchange Dealings (Speculative Dealings -

Margin Trading - Badla system)

Chapter-IV- Clearing and Settlement Process – ( Transaction Cycle

- Settlement Agencies - Clearing and Settlement Process -
Securities and Funds Settlement, Risks in settlement )
 Chapter-I
Trading in stock market

Trading Member and Membership

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 Trading
To “trade” means to buy and sell in the jargon of
the financial markets

Trading securities are investments in debt or equity that

management plans to actively trade for profits

After trading by the individuals/ Traders / companies , the

settlement takes place through NSE clearing Ltd (NSECL)
a wholly owned subsidiary of NSE

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 Objectives of NSECL

 To bring and sustain confidence in clearing and

settlement of securities;

 To promote and maintain, short and consistent settlement

cycles;

 To provide counter-party risk guarantee,

 To reduce risk of dealing with unknown party who can

default.

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 Trading member
Trading Member is one who has rights to trade on his own account as well as
on account of its clients. However has no right to clear and settle such trades
itself.

Membership of Metropolitan stock exchange of India Ltd (MSEI )can be taken

by an Individual, Registered Partnership Firm, Corporate or Bank.

There are two types of members- Self clearing member (SCM) and Trading
member ( T M )

The applicant should submit the duly filled Membership Application Form
along with the required documents and applicable fees /deposits and
registered with SEBI and should pay membership deposit of Rs 10 lakhs

If he is a Corporate, minimum paid up capital of the Corporate should be 30

lakhs .

Eligibility Criteria for at least 2 Directors of the corporate

Age - Minimum 21 years
Education - Should be at least HSC (Inter)
Experience - Minimum 2 years relevant experience 6
 Net worth & fee for a member
Segment of trading

Capital Features & Currency Debt segment

Markets options derivatives

Membership Membership Membership Membership

type- SCM type- TM type- TM type- TM

Net worth –Rs Net worth –Rs Net worth –Rs Net worth –
30 lakhs 30 lakhs 100 lakhs Rs 50 lakhs

Trading in one Segment Rs 2.50 lakhs, 2 segments- Rs 3.50 lakhs, 3 segments- Rs 4.50 lakhs

All segments- Rs 5 lakhs. Processing charges 10 ,000 / segment

 Chapter II
Trading System

( Neat System - Wireless Application Protocol

(Wap) and Computer to Computer Link (Ctcl)
Facility, Steps in Stock Trading - Order Management
- Trade Management - Block Trading - Jobbers vs.
Brokers - Internet Broking/ e-Broking )

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 NEAT System
National Exchange for Automated Trading' (NEAT) system is a
fully automated screen based trading system, which adopts the
principle of an order driven market.

NEAT system has three types of Market.

Normal Market-All orders which are of regular lot size or

multiples thereof are traded in the Normal Market

Odd lot Market- All orders whose order size is less than the
regular lot size are traded in the odd-lot market.

Auction Market-Auctions are initiated by the Exchange on

behalf of trading members for settlement related reasons.
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 WAP & CTCL
Wireless Application Protocol (Wap) and Computer to
Computer Link (CTCL) are technical standard for
accessing information over a wireless network through
mobile and computers

SEBI committee on Internet based trading services has

approved certain minimum requirement for brokers for
trading through wireless medium on WAP.

NSE offers a facility to its trading members by which

members can use their own trading front-end software in
order to trade on the NSE trading system.

This facility is called Computer-to-Computer Link (CTCL)

and is available only to trading members of NSE. 10
 Steps in stock trading
 There are two basic ways , exchanges execute a trade,
exchange floor trade and electronic trade

Exchange floor trade

 When the market is open, we see hundreds of people

rushing about shouting and gesturing to one another,
talking on phones, watching monitors, and entering data
into terminals.

 Yet, at the end of the day, the markets work out all the
trades and get ready for the next day.

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 Steps in Stock trading- on exchange floor
Investors inform the broker to buy 100 shares of a company at
market who in turn informs the brokers order department

 Brokers order department sends the order to their floor clerk

on the exchange.

 The floor clerk alerts one of the firm’s floor traders who finds
another floor trader willing to sell 100 shares of Ltd.

 The two agree on a price and complete the deal.

 The notification process goes back up the line and your broker
calls you back with the final price.

 This process is time consuming 12

 Stock trading- Electronic

 This system is efficient and fast.

 Many large institutional traders, such as pension

funds, mutual funds etc prefer this method of trading.

 However one still need a broker to handle the trades as

individuals don’t have access to the electronic markets.

 Through this process , the investors can get almost

instant confirmations on their trades

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 Trade Order management System

 An order management system (OMS) is an

electronic system developed to execute
securities orders in an efficient and cost-effective
manner.

 Brokers and dealers use OMS’s when filling orders for

various types of securities and are able to track the
progress of each order throughout the system.

 OMS’s are an important development in the securities

industry because of the significant cost savings they
provide to investment firms.
 Block Trade management System

 A block trade is a permissible, non competitive,

privately negotiated transaction

 The threshold quantity of shares is determined by the

exchange

 This is executed apart from the open outcry or

electronic markets.

 Major broker-dealers often provide “block trading”

services to their institutional clients

 This type of trading is known as “upstairs trading

desks”—
 Block Trade management System

For Example

 ABC Ltd is a hedge fund which holds a large

position of stocks in Company X and would like to
sell it completely.

 If this were put into the market as a large sell order,

the price would sharply drop

 Instead, the fund may arrange for a block trade with

another company through an investment bank,
benefiting both parties.
 Brokers Vs jobber Broker

A broker is a commission agent who transacts

business in securities on behalf of non members.

Jobber is a market maker. He is not allowed to deal

with the public directly .

He deals with brokers who are engaged with the

investors parties.

He maintains an inventory of shares in order to make

trades possible.
 Brokers Vs jobber Broker

When you place your order for 1,000 shares of XYZ Corp.,
the Broker can go to a Jobber who keeps an inventory of
XYZ stock, and buy the shares there.

Likewise, if you decide you want to sell those 1,000 shares,

your broker can sell them to the Jobber.

Jobbers typically post two prices for a stock, the price at

which they'll buy it for and the price at which they'll sell it
for.

The sell price will be slightly higher which is the profit for
the jobbers.
 Internet Broking / e Broking

 SEBI approved the report on Internet Trading in January

2000.

 Internet trading can take place through order routing

systems

 The client’s orders is routed through order routing

system to exchange trading systems for execution which
in turn is routed through brokers Internet trading
systems.

 Thus a client sitting in any part of the country would be

able to trade using the Internet as a medium .
 Internet Broking/ e Broking

 SEBI-registered brokers can introduce Internet based

trading after obtaining permission from respective
Stock Exchanges.

 SEBI has stipulated the minimum conditions to be

fulfilled by trading members to start Internet based
trading and services,
 Chapter III
Stock exchange dealings

(Speculative Dealings - Margin Trading - Badla

system)

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 Speculative dealings

 Speculation is the act of trading in an asset that

has a significant risk of either losing most or all of
the initial outlay or make huge profits as well.

 It is the practice of engaging in risky financial

transactions to make huge profit from short term
fluctuations in the market value of a
tradable financial instrument

 Many speculators pay little attention to

the fundamental value of a security and instead
focus purely on price movements.
 Types of Speculative dealings

 Option Dealings,
 Margin Trading,
 Arbitrage,
 Wash Sales,
 Blank Transfer,
 Carry Over or Budla Transactions,
 Cornering,
 Rigging the Market

(PPT on each of these by the groups- Not more than 2 to 3 slides)

 Margin trading

 Margin trading refers to the process whereby individual

investors buy more stocks than they can afford to.

 It is also intraday trading in India and various stock

brokers provide this service.

 Margin trading involves buying and selling of securities

in one single session.

 The process requires an investor to speculate or guess

the stock movement in a particular session.

 Margin trading is an easy way of making a fast buck.

 Margin trading

 A margin account provides the investors resources to buy

more quantities of a stock than they can afford and the
broker would lend the money to buy shares and keep
them as collateral.

 In order to trade with a margin account, one has to

request the broker to open a margin account for which a
certain amount of money upfront has to be paid to the
broker in cash as minimum margin.

 This margin amount will be used in case there is a loss in

the transaction by the broker .
 Badla System

 Badla is a carry-forward system invented on the Bombay

Stock Exchange as a solution to the perpetual lack of
liquidity in the secondary market.

 In this system, the trader could buy stocks by lending

mechanism from the broker by paying a small margin. He
speculates that the stock will be upward in near

 Badla is the charge, which the investor pays for carrying

forward his position.

 It is a hedge tool where an investor can take a position in

a scrip without actually taking delivery of the stock.
 Chapter IV
Clearing & settlement Process

Transaction Cycle - Settlement Agencies - Clearing

and Settlement Process - Securities and Funds
Settlement .

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 Transaction cycle- Settlement

Transaction cycle is the process when a person who has

bought or sold shares gets it or received money for the
shares he has sold.

It is the responsibility for stock exchanges to ensure

that every trade is properly matched, and shares are
received or delivered properly.

There are basically three tasks that are performed

Trading , Clearing and Settlement
 Transaction cycle- Settlement

Trading deals with placing an order and its execution.

Clearing deals with the determination of obligations in terms

of funds and securities.

Settlement will be completed through the settlement agent

called Clearing House . In BSE it is Bank of India share
holding (BOISH) and in NSE it is National Securities Clearing
Corporation -(NSCCL).

The stock exchanges in India are following T+1 rolling

settlement for all securities

The members receive the funds / securities in accordance

with the pay-in / pay-out schedules notified by the respective
exchanges.
 Transaction cycle- Settlement
Two depositories viz., the National Securities
Depositories Ltd (NSDL) and the Central Depositories
Services Ltd (CDSL) provide electronic transfer of
securities

Almost 100 % per cent of the turnover is settled in

dematerialized form.

The members / custodians make available the

required securities in their pool accounts with
depository participants (DPs) by the prescribed pay-in
time for securities .

The pay-in and pay-out of securities is put into effect

on the same day for all settlements.
 Transaction cycle- Settlement
Select banks have been empanelled by the clearing
agencies for the electronic transfer of funds.

The members are required to maintain accounts

with any of these banks.

The members are informed electronically of their

pay-in obligations of funds and they have to make
available the required funds in their accounts

The clearing agency forwards the funds’ obligations

files to the clearing banks which, in turn, debit the
accounts of members and credit the account of the
clearing agency
 Settlement Agencies

 Clearing corporation, with the help of clearing members,

custodians, clearing banks and depositories, settles the
trades executed on exchanges.

 Clearing corporation It performs the following tasks:

 Clears all trades.
 Determines obligations of members.
 Arranges for pay-in of funds and securities.
 Arranges for pay-out of funds and securities.
 Guarantees financial settlement.
 It also undertakes settlement of transactions on other
stock exchanges like the, Over the Counter Exchange of
India.
 Settlement Agencies

NSCCL for NSE is the and BOI Share Holding for BSE and are
responsible for the post-trade activities .

NSDL established in 1996 is the largest depository in India .

CDSL ,promoted by the Bombay Stock Exchange and the Bank

of India was formed in February 1999.

Both the depositories have a network of depository

participants (DPs) which are further electronically connected to
their clients.

All settlements for securities are through the clearing house on

a delivery versus payment (DVP) basis.
 Risks in Settlement

 Settlement risk is the risk that a counterparty does not

deliver a security or its value in cash as per agreement
when the other counterparty has already delivered
security or cash value as per trade agreement.

 Settlement risk may be mitigated through various

techniques such as Delivery versus payment and
settlement through clearing house
 Únit-4
concluded

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