Introduction to Screen Based Trading

Earlier system of trading was through an open outcry system which was an inefficient & time consuming system. In this system buyers and sellers had to search for each other on the stock exchange physically. In order to provide transparency, the National stock exchange introduced an online automated trading system. It is a screen based system in which orders are punched in terms of quantities and price at which the trader wants to execute the transaction. The order gets executed when the counterparty is found at the desired price and quantity. 

Following are some of the important terms which are associated with screen based trading:

1.1 NEAT 

NSE uses a satellite communication technology trading system, called National Exchange for Automated Trading (NEAT), a client server based application. The introduction of the neat system has improved the efficiency of the NSE trading. 

1.2 Contract Note 

Contract Note is the detailed note which shows the number of trades done on a particular day by one client. It is a kind of legal document between client and broker which depicts purchase /sale and settlement of trades. This document can be used for the purpose of evidence in case of any dispute. 

2. Types of Orders 

There are different types of orders which an investor can place with the stock exchange: 

2.1 Limit Orders 

When the orders are restricted by putting a fixed price. For Ex. ‘Buy ONGC at Rs 200”. Here, the order indicates the price at which it has to be bought and the buyer is not willing to give more than Rs 200. Limit orders remain dormant in the system until the limit price is hit. 

2.2 Best Rate Order 

As the name suggests, buyer/seller gives the liberty to the broker to execute the order at the best possible rate quoted on that particular date for buying. It may be the lowest rate for buying and the highest rate for selling. This is also known as market order. 

2.3 Stop Loss Order 

It is a very good mechanism to limit the loss happening due to fluctuations in the market. A particular limit is given for waiting. If the price falls below the limit, the broker is authorized to sell the shares to prevent further loss. For ex. Buy ONGC Ltd at Rs 225, stop loss at Rs220. 

3. Settlement Cycle 

3.1 Fixed Settlement Cycle: 

A fixed cycle starts on a particular day and ends after five days. For example, Bombay Stock Exchange- The settlement cycle used to start on Monday and ends on Friday and in National Stock Exchange, settlement cycle starts on Wednesday of one week and ends on the Tuesday of the following week. 

A pay-in day and a pay-out day follow the settlement cycle. The pay-in day refers to all the buyer brokers depositing the money for the purchase of shares. The payout day refers to the exchange handing over the proceeds to the seller brokers. 

If investors purchase 1000 shares of HPLC on Monday, to square up the position by the end of the settlement, the sale will have to take place before Friday, the same week. If the investor does not sell the share, he has to pay a consideration to the broker at the end of the settlement period. The broker collects the payments within four 4 days from the end of the settlement cycle from the clients and deposits it with the exchange on the pay-in day. After four days, on the pay-out day the exchange hands over the proceeds to the seller broker. 

Fixed settlement system does not exist now in any of the stock exchanges, it has been replaced by a rolling system. 

3.2 Rolling Settlement 

SEBI introduced rolling settlements from Jan 10, 2000. In a rolling settlement of a T+5 period trades are settled five days from the date of transaction. For Ex. If an investor buys 2000 shares of Tata Steel and sells 1000 shares on Monday. He would be asked to settle the net outstanding that is 1000 shares on the following Monday, the fifth day. This means all open positions on a trading day are settled on the fifth working day after the trading day. Now NSE and BSE follow the T+2 rolling settlement system.

4. Price Filters 

Due to fluctuations in the prices which leads to high transaction cost, price filters or circuit filters are introduced. Price range ensures that stock is traded only with in the given range. The filters are decided by the exchange authorities which may be 5% or 20%. 

5. Intraday Price Bands 

In Intraday price range, price range is fixed and price movement is allowed to vary between that ranges only. For Ex: At NSE, stocks have 10 % and 5% intraday price bands. Suppose, the stock closed on Monday at Rs. 500 at the NSE, it would be allowed to trade on Tuesday only in a 10% percent variation of Monday’s close. It would be allowed to trade between Rs. 450 and Rs. 550. At 555, the system will not accept the trade. The only drawback of Intraday price band is that is it does not allow for the proper reaction in prices for the given information. These price bands don’t apply to stocks listed in derivative trading. 

6. Margins 

Margins are additional filters applied by the stock exchanges to curb the price volatility. For every transaction undertaken by the broker he has to deposit a margin amount with the stock exchange. The margin amount paid is used as a tool to discourage speculative trading. Margin may be 

a)  Gross Exposure margin  

b)  Net Exposure margin  

c)  Mark to Market margin  

6.1 Gross Exposure Margin 

This is the margin which is taken in advance of transactions in order to protect against any default made. This margin limits the risk exposure of the investor by putting an upper limit to his transaction. 

6.2 Net Exposure Margin 

The investor has to deposit margins on the net outstanding positions i.e. when Purchase is greater than sales. For example, if an investor buys one lakh shares of Reliance at Rs 185 and sells only 30,000 for the net outstanding position of 70,000 shares poses a threat. Hence, he has to deposit a margin for the net exposure of 70,000 shares. This helps investors to curtail the risk involved in heavy purchase without matching sale. 

6.3 Mark to Market Margin 

The above two margins try to stabilize the high transaction volume. Mark to market margin protects the risk arising through price volatility. It is the amount of difference that a buyer or seller has to pay when the market price falls below the transaction price or rises above the transaction price. In the mark to market margin the trader has to deposit a sum that would be a fixed percentage of the product of the difference between the closing selling and purchasing price and the outstanding net position at the end of the day. Mark to market is applicable mainly in the derivative transactions which are settled on daily basis.