SECONDARY MARKET/STOCK EXCHANGES

MEANING
The secondary market is where investors buy and sell securities they already own. The
national exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ, are
secondary markets.
FUNCTIONS OF SECONDARY MARKET
Some of the Important Functions of Stock Exchange/Secondary Market are listed below:
1. Economic Barometer:
A stock exchange is a reliable barometer to measure the economic condition of a country.
Every major change in country and economy is reflected in the prices of shares. The rise
or fall in the share prices indicates the boom or recession cycle of the economy. Stock
exchange is also known as a pulse of economy or economic mirror which reflects the
economic conditions of a country.
2. Pricing of Securities:
The stock market helps to value the securities on the basis of demand and supply factors.
The securities of profitable and growth oriented companies are valued higher as there is
more demand for such securities. The valuation of securities is useful for investors,
government and creditors. The investors can know the value of their investment, the
creditors can value the creditworthiness and government can impose taxes on value of
securities.
3. Safety of Transactions:
In stock market only the listed securities are traded and stock exchange authorities
include the companies names in the trade list only after verifying the soundness of
company. The companies which are listed they also have to operate within the strict rules
and regulations. This ensures safety of dealing through stock exchange.
4. Contributes to Economic Growth:
In stock exchange securities of various companies are bought and sold. This process of
disinvestment and reinvestment helps to invest in most productive investment proposal
and this leads to capital formation and economic growth.
5. Spreading of Equity Cult:
Stock exchange encourages people to invest in ownership securities by regulating new
issues, better trading practices and by educating public about investment.
6. Providing Scope for Speculation:
To ensure liquidity and demand of supply of securities the stock exchange permits healthy
speculation of securities.
7. Liquidity:
The main function of stock market is to provide ready market for sale and purchase of
securities. The presence of stock exchange market gives assurance to investors that their
investment can be converted into cash whenever they want. The investors can invest in
long term investment projects without any hesitation, as because of stock exchange they
can convert long term investment into short term and medium term.
8. Better Allocation of Capital:
The shares of profit making companies are quoted at higher prices and are actively traded
so such companies can easily raise fresh capital from stock market. The general public
hesitates to invest in securities of loss making companies. So stock exchange facilitates
allocation of investor’s fund to profitable channels.
9. Promotes the Habits of Savings and Investment:
The stock market offers attractive opportunities of investment in various securities. These
attractive opportunities encourage people to save more and invest in securities of
corporate sector rather than investing in unproductive assets such as gold, silver, etc.

TYPES OF SECONDARY MARKET

Secondary markets are primarily of two types – Stock exchanges and over-the-counter
markets.
Stock exchange
Stock exchanges are centralised platforms where securities trading take place, sans any
contact between the buyer and the seller. National Stock Exchange (NSE) and Bombay
Stock Exchange (BSE) are examples of such platforms.
Transactions in stock exchanges are subjected to stringent regulations in securities
trading. A stock exchange itself acts as a guarantor, and the counterparty risk is almost
non-existent. Such a safety net is obtained via a higher transaction cost being levied on
investments in the form of commission and exchange fees.
Over-the-counter (OTC) market
Over-the-counter markets are decentralised, comprising participants engaging in trading
among themselves. OTC markets retain higher counterparty risks in the absence of
regulatory oversight, with the parties directly dealing with each other. Foreign exchange
market (FOREX) is an example of an over-the-counter market.
In an OTC market, there exists tremendous competition in acquiring higher volume. Due
to this factor, the securities’ price differs from one seller to another.
Apart from the stock exchange and OTC market, other types of secondary
market include auction market and dealer market.
The former is essentially a platform for buyers and sellers to arrive at an understanding
of the rate at which the securities are to be traded. The information related to pricing is
put out in the public domain, including the bidding price of the offer.
Dealer market is another type of secondary market in which various dealers indicate
prices of specific securities for a transaction. Foreign exchange trade and bonds are traded
primarily in a dealer market.
Examples of Secondary Market Transactions
Secondary market transactions provide liquidity to all kinds of investors. Due to high
volume transactions, their costs are substantially reduced. Few secondary market
examples related to transactions of securities are as follows.
In a secondary market, investors enter into a transaction of securities with other
investors, and not the issuer. If an investor wants to buy Larsen & Toubro stocks, it will
have to be purchased from another investor who owns such shares and not from L&T
directly. The company will thus not be involved in the transaction.
Individual and corporate investors, along with investment banks, engage in the buying
and selling of bonds and mutual funds in a secondary market.
ADVANTAGES OF SECONDARY MARKET
▪ Investors can ease their liquidity problems in a secondary market conveniently.
Like, an investor in need of liquid cash can sell the shares held quite easily as a
large number of buyers are present in the secondary market.
▪ The secondary market indicates a benchmark for fair valuation of a particular
company.
▪ Price adjustments of securities in a secondary market takes place within a short
span in tune with the availability of new information about the company.
▪ Investor’s funds remain relatively safe due to heavy regulations governing
a secondary stock market. The regulations are stringent as the market is a
source of liquidity and capital formation for both investors and companies.
▪ Mobilisation of savings becomes easier as investors’ money is held in the form of
securities.
DISADVANTAGES OF SECONDARY MARKET
▪ Prices of securities in a secondary market are subject to high volatility, and such
price fluctuation may lead to sudden and unpredictable loss to investors.
▪ Before buying or selling in a secondary market, investors have to duly complete the
procedures involved, which are usually a time-consuming process.
▪ Investors’ profit margin may experience a dent due to brokerage commissions
levied on each transaction of buying or selling of securities.
▪ Investments in a secondary capital market are subject to high risk due to the
influence of multiple external factors, and the existing valuation may alter within
a span of a few minutes.

RECOGNITION AND ORGANIZATION OF STOCK EXCHANGES IN INDIA

The membership of stock exchanges initially comprised of individuals and partnership
firms. A number of financial institutions are now members of Indian exchanges. Over the
years, stock exchanges have been organized in various forms:
(a) A company limited by shares
(b) A company limited by guarantee
The stock exchanges are free to constitute themselves in any form or organization keeping
in view the merits and demerits of every type because in order to function effectively, an
institution must organise itself on sound footings which lead to the realization of
objectives for which it is setup.
i) Limited by shares
"Limited by shares" means that the liability of the shareholders to creditors of the
company is limited to the capital originally invested, i.e. the nominal value of
the shares and any premium paid in return for the issue of the shares by the company. A
limited company may be "private" or "public". A private limited
company's disclosure requirements are lighter, but its shares may not be offered to the
general public and therefore cannot be traded on a public stock exchange. This is the
major difference between a private limited company and a public limited company. Most
companies, particularly small companies, are private.
ii) Limited by Guarantee
A company limited by guarantee does not have any shares or shareholders (like the more
common limited by shares structure) but is owned by guarantors who agree to pay a set
amount of money towards company debts.
The personal finances of the company’s guarantors are protected. They will only be
responsible for paying company debts up to the amount of their guarantees.

History of Recognizing Stock Exchanges in India

Sh G.S. Patel Committee report in 1984 observed that, there is a growing feeling in the
country for a uniform organsiational structure, created with uniform rules, bye-laws and
regulations for the governance of the stock exchanges. With precise powers, duties and
responsibilities of office bearers and members, it would serve the investment community
better. The establishment of stock exchanges with uniform organizational structure.
alongwith uniform rules, bye-laws and regulations will encourage competition among the
stock exchanges. It will also help in toning up the administrative and operative efficiency.
The committee recommend that whenever new stock exchanges are to be established
hereafter, the government should grant recognition, only to companies limited by
guarantee. In case of existing stock exchanges, which are association of persons and
companies limited by shares they should also switch over to new form by following the
procedure laid down in companies Act 1956.

MANAGEMENT OF STOCK EXCHANGES IN INDIA

The management of a stock exchange in India is vested in governing authority that has
got different nomenclatures at different stock exchange-like:
i) Governing Board at stock exchange, Mumbai
ii) Committee at Kolkata Stock Exchange.
iii). Council of Management at Chennai Stock Exchange
iv) Board of Directors at Delhi Stock Exchange
Constitution of India:
Under the constitution of India (Article 246, Union list, Entry 48) the governing body of
a recognised stock exchange, in India has wide governmental and administrative power
subject to the government approval to make, amend or suspend the operation of the rules,
bye-laws and regulations of the stock exchange.
Composition of Governing body of Stock Exchange
It comprises of elected and nominated members headed by the president oflook after the
dayto-day working of the exchange. The managing committee has complete jurisdiction
over the members of the stock exchange and various subcommittees. Governing board of
the stock exchanges as the name may be generally comprised of elected brokers, SEBI
nominees, RBI nominees, and government and public representatives.
Membership, Organisation and Management of Some Major Stock Exchange in India
There are 23 stock exchanges in India. But among these stock exchanges there are four
famous stock exchanges in India namely Bombay Stock Exchange (BSE) National Stock
Exchange (NSE), Over the Counter Exchange of India (OTCEI) and Inter-Connected
Stock Exchange of India (ICSEI).

BOMBAY STOCK EXCHNAGE

Origin:
The Bombay Stock Exchange (BSE) which was established in the year 1875, is one ofthe
oldest organised exchanges in the world.
Recognition:
The Securities Contracts (Regulation) Act 1956, accord BSE its pre-eminent position by
granting it permanent recognition. In early 1995, the BSE finally put the automated
trading programme in place.
Organizational Structure
Governing Board of Bombay Stock Exchange
Executive Director 1
Elected Directors 6
SEBI Nominee 1
RBI Nominee 1
Public Representatives 5
While the board deals with the broad policy issues, the executive committee, formed
under the Articles of Association and rules, manages the day-to-day affairs ofthe
exchange.

Committees in BSE
(i) Executive Committee
(ii) Disciplinary Action Committee
(iii)Risk Management Committee
(iv) Committee on Trade Issues
(v) Committee on Settlement Issues
(vi) Dispute Resolution Committee.
The day-to-day management of the stock exchange is delegated to the managing director
who is supported by a team of professional staff.

Bombay Stock Exchange v. Jaya Shah, 2004

Supreme Court has held that Bombay stock exchange, rules, byelaws and regulations
although are made under a statute, but having regard to the scheme as also the purport
and object thereof, have a statutory flavor. Byelaws are required to be made for regulation
and control of contracts, whereas rules relate to in general to the constitution and
management of a stock exchange. Hence, each stock exchange has its own bye laws.

Blue Blends Finance v. Securities and Exchange Board of India 2009

Trading in the scrip of ‘P’ company, whose shares were listed in BSE, was suspended with
effect from 10-9-2001. However, the appellants, promoters of the company, inter re
executed trades in the scrip of the company in 2006. The total shares traded among them
constituted 44.22 percent of the share capital of the company. The appellants in terms of
regulation 3(3) were required to inform the BSE of their proposed
transactions/acquisitions at least four days prior to the date of the transactions. However,
the informed the BSE about the same with a delay of four days. The adjudicating officer
held that the appellants were guilty of violating regulation 3(3) and imposed penalty of
Rs. 1 lakh on them.

NATIONAL STOCK EXCHANGE OF INDIA

Corporate Structure of National Stock Exchange NSE is one of the first demutualised
stock exchange in the country, where the ownership and management ofthe exchange is
completely divorced from the right to trade on it. Though the impetus for its
establishment came from policy makers in the country, it has been set up as a public
limited company, owner by the leading institutional investors in the country.

Board of Directors in NSE

Chairman 1
Managing Director 1
Deputy Managing Director 1
Directors 15
SEBI Nominee 1
RBI Nominee 1
Public Representatives 5
The NSE model however, does not preclude, but in fact accommodates involvement
support and contribution of trading members in a variety of ways. Its Board comprises of
senior executives from promoter institutions, eminent professionals in the fields of law,
economics, accountancy, finance, taxation etc, public representatives, nominees of SEBI
and one full time executive of the Exchange.
While the Board deals with policy issues, decisions relating to market operations are
delegated by the Board to various committees constituted by it. Such committees include
representatives from trading members, professionals, the public and the management.
The day-to-day management of the exchange is delegated to the Managing Director who
is supported by a team of professional staff.
Committees in NSE
The Exchange has constituted various committees to advise it on areas such as good
market practices, settlement procedure, risk containment system etc. These committees
are managed by industry professionals, trading members, exchange staff as also
representatives from the market regulator. There are three committees in the NSE.
(i) Executive Committee
(ii) Committee on Trade Related Issues (COTI)
(iii) Advisory Committee-Listing of Securities
i) Executive Committee The main objective of the executive committee is to manage
the day-to-day operations ofthe exchange.
(ii) Committee on Trade Issues (COTI) The main functions of the Committee on
Trade Issue is to provide guidance on trade related issues which crop up during the day-
to-day functioning of the exchange.
(iii) Advisory Committee- Listing of Securities The main objectives of the Advisory
Committee is to advise NSE on various issues:
(i) The suitability of the Companies for listing on the exchange within the parameters set
out by the listing agreement.
(ii) To ensure that the applicant company has complied with all the conditions set out in
the listing agreement as well as other formalities, SEBI regulations etc.
(iii) Systems and procedures to be adopted for listing of Securities.

Important Features of National Stock Exchange

National Stock Exchange has some important features and characteristic for example:
(i) NSE can provide capital to smaller stock exchanges.
(ii) At least 50% ofthe Board of directors of NSE should be professionals, who are non-
members.
(iii)It should have separate trading ring and time for creating active secondary market in
debt instruments.
(iv) Listing of medium sized companies should be encouraged.
(v) There should be compulsory jobbers and market makers to ensure liquidity.
(vi)NSE should have well stocked library and research facilities on commercial basis.
(vii) Incorporation ofNSE for providing better service in context of stock market.
(viii)National Stock Exchange is a screen based two-tier trading ring one each for equity
and debt instrument. A nation wide link up of exchange with various local centres is in
place and NSE terminals are operation in many important towns of the country.
(lx)NSE has no trading floor. Each trading member will have a computer in his office,
anywhere in India, which will be connected to the central computer system of NSE
(x) The NSE will operate two segments, namely debt market (Money market) and equity
market (Capital market) and operation in both are separately maintained.

OVER THE COUNTER EXCHANGE OFINDIA (OTCEI)

The establishment of the over the counter exchange of India (OTCEI) marked the dawn
of a new era in the history of stock exchanges in India. The OTC Exchange is regarded a
blessing for the small both existing and new, companies and for investors, particularly
small investors.19 The OTCEI which was incorporated in 1990 became fully operational
in 1992.
(a) Promoters of the Over the Counter Exchange of India (OTCEI)
Over the Counter Exchange of India (OTCEI) has promoted by UTI, IDBI, IFCI, LIC, GIC,
SBI capital Market and Canara bank Financial Services as a non-banking company under
the companies Act, 1956.
(b) Salient Features of Over the Counter Exchange of India (OTCEI)
The OTCEI has a number of distinguishing features vis-a-vis other stock exchange.
(i) OTC Exchange of India has picked the model from the NASADQ system (National
Association of Security Dealers - Automated Quotations)
(ii) While other stock exchanges are associations formed by stock brokers, the OTCEI is a
company promoted by Financial Institutions.
(iii) The OTC Exchange is a market for spot deals only
(iv) The OTC Exchange permits automatic transfer upto 0.5 percent of a company’s equity
whereas in other cases permission of the companies required for all transfers.
(v) The OTCEI is characterized by a decentralized working with national work. Other
exchanges are centralized in nature, members operating from a single location.
INTER-CONNECTED STOCK EXCHANGE OF INDIA
a) General
Inter-Connected Stock Exchange of India Limited (ISE), has been promoted by 15
regional stock exchanges to provide trading linkage/connectivity to all the participating
exchanges to when their market. Thus, ISE is a national level exchange providing trading,
clearing, settlement, risk management and surveillance supported to the Inter-Connected
Market System (ICMS). ISE aims to address the needs of small companies and retail
investors with the guiding principle of optimizing the infrastructure and harnessing the
potential of regional markets to transform these into a liquid and vibrant market through
the use of technology and networking.
Organization
The participating exchanges in ISE have in all about 4,500 traders. In order to leverage
its infrastructure as also expand its nation-wide reach, ISE has also appointed dealers
across various cities other than the participating exchange centres. These dealers are
administratively supported through strategically located regional offices at Delhi,
Calcutta, Chennai, Nagpur. ISE, thus, expects to emerge as low cost national level
exchange in the country for retail investors and small intermediaries.

Important Features of Inter-Connected Stock Exchange of India

There are some of the features which make ISE a new age stock exchange are as follows:
(i) ISE is a national level recognised stock exchange having moderate listing fees and
granting listing and trading permission to small and medium sized companies having a
post public issue paid-up capital of Rs. 3 crore to Rs. 5 crore (subject to the appointment
of market makers), besides companies with a capital of above Rs. 5 crore.

(ii) All traders and dealers of ISE have access to NSE through ISE securities and Services
Ltd. (ISS), which ensures the continuous attention of investors.

(iii) ISE has set up an ‘Investor Grievance and Service Cell’ which looks after all types of
complaints of investors located across the country and provides decentralized support.

(iv) Listing of stocks with ISE would give the company an advantage of being identified
as a technology-savvy and investor-friendly company.

LISTING OF SECURITIES
The inclusion of the name of a company in the official list of securities, which can be dealt
with in a stock exchange, is called listing. It implies the securities of a company to the
trading privileges on a stock exchange.
By getting its securities listed, a company can create a favorable impression in the mind
of the investors about its financial soundness, profitability and the marketability of its
shares and other securities. At the same time, it should also be remembered that listing
would no way guarantee the earning capacity of the securities of the issuing company.
Moreover, in India, the Central Government is also empowered under Sec. 21 of the
Securities Contracts (Regulation) Act to compel a public limited company to get its
securities listed on any recognized stock exchange, with a view to protect the broad
interests of the investing public.
Any company, which wants to get its shares listed, should apply to regional stock exchange
i.e. to the stock exchange nearest to its registered office. It may also get its shares listed
on other stock exchanges as well.
Objectives of Listing
According to S. C. Kuchhal, the main objectives of listing are the following:
1. Provision of ready marketability.
2. Imparting liquidity to the securities.
3. Provision of free negotiability.
4. Protection of the interests of the investors and the general public.

ADVANTAGES OF LISTING
The advantages of listing can be summarized under two heads namely:
1.Advantages to the company management.
2. Advantages to the investors.

Advantages to the company management

1. It gives the management and the company a higher status and facilitates expansion
programmes.
2. Such companies can raise finance very easily.
3. Listed companies are eligible for certain fiscal advantages such as concessional rate of
income tax, benefits of carry forward and set off of losses of the earlier years etc.
4. Such companies are better placed while approaching the SEBI for its consent under any
of the provisions of the SEBI Act.
5. Listed companies are treated favorably by the financial institutions and commercial
banks when they approach them for short-term and long-term accommodations.

Advantages to the investors

1. Listing makes the securities more prestigious and enhances their marketability. Hence,
the holders of such securities can convert their holdings without any difficulty in times of
need.
2. The security prices are regularly published in the financial newspapers and periodicals.
Hence, the investors can sell their holdings at the current market price.
3. Such securities generally fetch higher prices.
4. Holders of listed securities are eligible for certain concessions in matters relating to
Income Tax, Wealth Tax etc. in their capacity as assessees.
5. Listed securities enjoy more public confidence. Hence, they have high collateral value.
The bankers will readily accept such securities for providing loans and other
accommodations.
6. Listed companies should make a fair disclosure of certain information and so the
investors are given a reasonable opportunity of judging the merits of the concern.
7. Listed securities ensure safety to the funds of the investors.

DISADVANTAGES OF LISTING
Listing, however, is not free from defects. The procedure of listing has certain definite
limitations and disadvantages. Some of the inherent limitations of listing are given below:
1. Listing makes people depend upon share brokers, jobbers etc. Many of them are weak
speculators and frequently put their clients into difficulties. They create violent price
fluctuations.
2. Securities, which are unable to have a stable value, shall loose their prestige and fell
down in the esteem of the investors and bankers.
3. The management is also induced to show keen interest in the price movements for
personal gains. They may take advantage of their inside knowledge and indulge in
speculation.
4. The free negotiability of securities enables a few interested persons to buy a substantial
portion of the securities and thereby capture the management of the company.
5. The company should furnish certain information in detail. Such a detailed disclosure
may even injure the prospects of the company.
These defects, however, are not incurable defects. Proper regulation may solve the
problem to a considerable extent. Sachar Committee also made a few solid
recommendations to cure the defects associated with listing. But no concrete measures
were taken so far and the shareholders still remain unprotected. Thus, there is a strong
case for a thorough investigation into the problem and formulation of suitable regulatory
measures in this regard.

Listing requirements

A company which desires to list its shares in a stock exchange has to comply with the
following requirements:

1. Permission for listing should have been provided for in the Memorandum of
Association and Articles of Association.

2. The company should have issued for public subscription at least the minimum
prescribed percentage of its share capital (49 percent).

3. The prospectus should contain necessary information with regard to the opening of
subscription list, receipt of share application etc.

4. Allotment of shares should be done in a fair and reasonable manner. In case of over
subscription, the basis of allotment should be decided by the company in consultation
with the recognized stock exchange where the shares are proposed to be listed.

5. The company must enter into a listing agreement with the stock exchange. The listing
agreement contains the terms and conditions of listing. It also contains the disclosures
that have to be made by the company on a continuous basis.

Minimum Public Offer

A company which desires to list its securities in a stock exchange, should offer at least
sixty percent of its issued capital for public subscription. Out of this sixty percent, a
maximum of eleven percent in the aggregate may be reserved for the Central government,
State government, their investment agencies and public financial institutions.

The public offer should be made through a prospectus and through newspaper
advertisements. The promoters might choose to take up the remaining forty percent for
themselves, or allot a part of it to their associates.

Fair allotment
Allotment of shares should be made in a fair and transparent manner. In case of over
subscription, allotment should be made in an equitable manner in consultation with the
stock exchange where the shares are proposed to be listed.

In case, the company proposes to list its shares in more than one exchange, the basis of
allotment should be decided in consultation with the stock exchange which is located in
the place in which the company’s registered office is located.

Listing Procedure
The following are the steps to be followed in listing of a company’s securities in a stock
exchange:
1. The promoters should first decide on the stock exchange or exchanges where they want
the shares to be listed.

2. They should contact the authorities to the respective stock exchange/ exchanges where
they propose to list.

3. They should discuss with the stock exchange authorities the requirements and
eligibility for listing.

4. The proposed Memorandum of Association, Articles of Association and Prospectus

should be submitted for necessary examination to the stock exchange authorities

5. The company then finalizes the Memorandum, Articles and Prospectus

6. Securities are issued and allotted.

7. The company enters into a listing agreement by paying the prescribed fees and
submitting the necessary documents and particulars.

8. Shares are then and are available for trading.

 SECONDARY MARKET INTERMEDIARIES- STOCK BROKERS- THEIR
REGISTRATION AND FUNCTIONS, SUB-BROKERS

Stock broking business was the one of the least regulated business till establishment of
Securities and Exchange Board of India. The business rules were very simple and the
operation ofthe Stock broker was confined to one city 79 in which the Stock Exchange was
located. The members ofthe exchange need to have their business operation strictly within
the municipal limits of the city [Section 13 of Securities Contract Regulation Act [SC(R)A]
empowers the government to declare contracts in notified areas illegal in certain
circumstances]. The stock exchanges were of under the impression that iftheir member
(Stock broker) has to expand their operation to a new town, the exchange has to have a in
the new town. Severe penalties including that of imprisonment for a term which may
extend up to one year for contravention of section 13, 16, 17 and 19 of SC(R)A really
threatened the exchanges and it members.
Later on. With the recommendation of the committee and government’s decision, this
limitation was removed (Stock Exchanges vide their letter no. F.14/7/SE/85 dated March
27, 1986).
Further, the government recommended that Stock Exchanges should encourage Stock
brokers open their branch offices in towns where there are no stock exchanges.

Registration, role & functions of Stock brokers and sub-brokers:

Registration, role & functions of Stock brokers and sub-brokers are governed by 80 SEBI
(STOCK BROKERS AND SUB-BROKERS) RULES, 1992.The aforesaid regulations
defines respectively that "stock broker" means a member of a stock exchange; "sub-
broker” means any person not being a member of a stock exchange who acts on behalf of
a stock-broker as an agent or otherwise for assisting the investors in buying, selling or
dealing in securities through such stock-brokers; No stock-broker or sub-broker shall
buy, sell, and deal in securities, unless he holds a certificate granted by the Board under
the regulations.

Eligibility for Registration

To be eligible for grant of such a registration a Stock Broker

i. shall the membership of any stock exchange;

ii. he shall abide by the rules, regulations and bye-laws of the stock exchange or stock
exchanges of which he is a member;
iii. In case of any change in the status and constitution, the stock broker shall obtain
prior permission of the Board to continue to buy, sell or deal in securities in any
stock exchange;
iv. he shall pay the amount of fees for registration in the manner provided in the
regulations; and –
 v. he shall take adequate steps for redressal of grievances of the investors within one
month of the date of the receipt of the complaint and keep the Board informed
about the number, nature and other particulars of the complaints received from
such investors.

Eligibility Criteria for Registration as Stock Broker

The Board shall take into account for considering the grant of a certificate all matters
relating to buying, selling, or dealing in securities and in particular the following, namely,
whether the stock broker –

i. is eligible to be admitted as a member of a stock exchange;

ii. has the necessary infrastructure like adequate office space, equipments and man
power to effectively discharge his activities; -
iii. has any past experience in the business of buying, selling or dealing in securities; -
is subjected to disciplinary proceedings under the rules, regulations and byelaws
of a stock exchange with respect to his business as a stock-broker involving either
himself for any of his partners, directors or employees; -
iv. is a fit and proper person.

Eligibility Criteria for Registration as Sub-Broker

The eligibility criteria for registration as a sub-broker shall be as follows, namely:

a. the applicant is not less than 21 years of age;

b. the applicant has not been convicted of any offence involving fraud or dishonesty;

c. the applicant has at least passed 12th standard equivalent examination from an
institution recognized by the Government;

d. The applicant is a fit and proper person". Provided that the Board may relax the
educational qualifications on merits having regard to the applicant's experience.

e. In the case of partnership firm or a body corporate the partners or directors, as the case
may be, shall comply with the requirements contained in clauses (a) to (c) ofsub-
regulation (i).

Obligations of Stock Brokers

Every stock-broker shall keep and maintain the following books of accounts, records and
documents namely; -

i. Register of transactions (Sauda Book);

ii. Clients ledger;
iii. General ledger;
iv. Journals;
 v. Cashbook;
vi. Bank pass book;
vii. Documents register should include particulars of shares and securities received
and delivered;
viii. Members’ contract books showing details of all contracts entered into by him with
other members of the same exchange or counterfoils or duplicates of memos of
confirmation issued to such other member;
ix. Counterfoils or duplicates of contract notes issued to clients;
x. Written consent of clients in respect of contracts entered into as principals; Margin
deposit book;
xi. Registers of accounts of sub- brokers;
xii. an agreement with a sub- broker specifying the scope of authority and
responsibilities of the Stock-Broker and such sub- broker.

Where it appears to the Board so to do, it may appoint one or more persons as inspecting
authority to undertake inspection of the books of accounts, other records and documents
of the stock- brokers.

Obligations of Sub-Broker

1. Pay the fees as prescribed

2. Abide by the Code ofConduct

3. Enter into an agreement with the stock broker for specifying the scope ofhis authority
and responsibilities.

Stock-Brokers to abide by Code of Conduct:

The stock-broker holding a certificate shall at all times abide by the Code of Conduct as
specified hereunder.

A. General Code of Conduct for Stock Broker

1.Integrity:

A stock-broker, shall maintain high standards of integrity, promptitude and fairness in

the conduct of all his business.

2. Exercise of Due Skill and Care:

A stock-broker, shall act with due skill, care and diligence in the conduct of all his
business.

3, Manipulation:
A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or
schemes or spread rumours with a view to distorting market equilibrium or making
personal gains.

4. Malpractices:

A stock-broker shall not create false market either singly or in concert with others or
indulge in any act detrimental to the investor’s interest or which leads to interference with
the fair and smooth functioning of the market. A stock-broker shall not involve himself in
excessive speculative business in the market beyond reasonable levels not commensurate
with his financial soundness.

5. Compliance with Statutory Requirements:

A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued
by the Government, the Board and the stock exchange from time to time as may be
applicable to him.

B. Duty to the investor

1. Execution Of Orders:

A stock-broker, in his dealings with the clients and the general investing public, shall
faithfully execute the orders for buying and selling of securities at the best available
market price and not refuse to deal with a Small Investor merely on the ground of the
volume of business involved. A stock-broker shall promptly inform his client about the
execution or non-execution of an order, and make prompt payment in respect of securities
sold and arrange for prompt delivery of securities purchased by clients.

2. Issue Of Contract Note;

A stock-broker shall issue without delay to his client a contract note for all transactions in
the form specified by the stock exchange.

3. Breach of True:

A stock-broker shall not disclose or discuss with any other person or make improper use
ofthe details ofpersonal investments and other information of a confidential nature ofthe
client which he comes to know in his business relationship.

4. Business and Commission;

A stock-broker shall not encourage sales or purchases of securities with the sole object of
generating brokerage or commission. A stock-broker shall not furnish false or misleading
quotations or give any other false or misleading advice or information to the clients with
a view of inducing him to do business in particular securities and enabling himselfto earn
brokerage or commission thereby.

5. Business Of Defaulting Client:

A stock-broker shall not deal or transact business knowingly, directly or indirectly or

execute an order for a client who has failed to carry out his commitments in relation to
securities with another stock-broker.

6. Fairness to Clients;

A stock-broker, when dealing with a client, shall disclose whether he is acting as a

principal or as an agent and shall ensure at the same time that no conflict of interest arises
between him and the client. In the event of a conflict of interest, he shall inform the client
accordingly and shall not seek to gain a direct or indirect personal advantage from the
situation and shall not consider clients' interest inferior to his own.

7. Investment Advice;

A stock-broker shall not make a recommendation to any client who might be expected to
rely thereon to acquire, dispose of, retain any securities unless he has reasonable grounds
for believing that the recommendation is suitable for such a client upon the basis of the
facts, if disclosed by such a client as to his own security holdings, financial situation and
objectives of such investment. The stock-broker should seek such information from
clients, wherever he feels it is appropriate to do so. Followings are the provisions for
investment advice:

a. A stock broker or any of his employees shall not render, directly or indirectly, any
investment advice about any security in the publicly accessible media, whether real - time
or non real-time, unless a disclosure of his interest including the interest of his dependent
family members and the employer including their long or short position in the said
security has been made, while rendering such advice.

b. In case, an employee of the stock broker is rendering such advice, he shall also disclose
the interest of his dependent family members and the employer including their long or
short position in the said security, while rendering such advice.

8. Competence Of Stock Broker;

A stock-broker should have adequately trained staff and arrangements to render fair,
prompt and competent services to his clients.

C. Stock-brokers vis-a-vis other stock-brokers

1. Conduct Of Dealings;
A stock-broker shall co-operate with the other contracting party in comparing unmatched
transactions. A stock-broker shall not knowingly and willfully deliver documents which
constitute bad delivery and shall co-operate with other contracting parly for prompt
replacement of documents which are declared as bad delivery.

2. Protection Of Clients Interests:

A stock-broker shall extend fullest cooperation to other stock-brokers in protecting the

interests of his clients regarding their rights to dividends, bonus shares, right shares and
any other right related to such securities.

3. Transactions With Stock-Brokers:

A stock-broker shall carry out his transactions with other stock-brokers and shall comply
with his obligations in completing the settlement oftransactions with them.

4. Advertisement And Publicity; A stock-broker shall not advertise his business publicly
unless permitted by the stock exchange.

5. Inducement Of Clients:

A stock-broker shall not resort to unfair means of inducing clients from other stock-
brokers.

6. False Or Misleading Returns;

A stock-broker shall not neglect or fail or refuse to submit the required returns and not
make any false or misleading statement on any returns required to be submitted to the
Board and the stock exchange.

ONLINE TRADING

The stock market has been a part of people's lives throughout the twentieth century.
Millions of people around the world have invested money in their countries own
respective markets. Since the coming of age of online trading, more people have been
investing their money in stocks than ever before because of the advantages it offers.
Online trading allows people to trade stocks quickly without the help of a broker, letting
the investor have more control over their transactions. The competition between
companies has helped decrease the cost of making the transactions. In addition to that,
ordinary people now have access to information that could only be seen by brokers.
Overall, online trading saves time, money and gives power to the investor rather than the
broker. Although trading online sounds great, there are still many disadvantages. The
most important one being that many people that have little experience with the stock
market have started to invest in it, causing them to lose money. The privacy issue is
another problem of main concern, especially with the amount of hackers that exist. In
addition, the internet has constant failures that can never be predicted. Another
complaint that is made is the fact that some ofthese online trading companies take too
long to make transactions while they advertise them to be fast. Furthermore, these
investment firms are hard to contact in case there is an emergency. Despite these
problems many companies have emerged in the online trading world. Each ofthem offers
their own special way of attracting potential investors to deal with them. Charles Schwab
and E-Trade are the main companies leading the way in 52 online trading.

Online Trading - Global Scenario

Online trading has become very popular in the last couple of years because ofthe
convenience of case and use. Numerous companies have gone online to meet their
customers demands, enabling them to trade when they want and how they want to.
Trading has existed for as long as we can remember and when we talk about it. We are
referring to trade as in financial dealings. Trading is the buying and selling of goods and
services, but in the current context, it is the buying and selling of financial services,
including securities, through the world Wide Web.
Online trading has basically replaced a phone call with the Internet. Instead of interacting
with brokers over the phone, the customer is clicking the mouse, not to mention that other
options are still available, but at a cost.

Online trading in securities is an online platform that gives you access to stock exchange.
For this you need to register with an online trading portal and it facilitates you to trade in
various financial instruments such as equities, mutual fund and commodities.
BSE provides online trading system known as BOLT and NSE’s online trading system is
known as NEAT (National Exchange for Automated Trading).

Safety Measures
Before investing online in share market, investors must take some safety measures
such as:
a) Investor should never share his password with anyone and must change it at
periodic intervals
b) Operating an online trading account from cyber cafes should be avoided
c) The default password provided by broker should be changed
d) Check for confirmation after placing an order
e) Investor should always ensure that sufficient securities are available in his account
f) Regular payment of margins should be made to avoid blocking of account

How to open an online trading account?

In order to trade online in stock market, one needs to open an online trading account
with the registered broker. You could also check the reviews of brokers and choose
 accordingly. To open an online trading account in India you need a proof of identity
and residence.

How online trading is different from offline trading?

Offline trading has lost popularity in India

a) Online trading consumes less time as compared to offline trading
b) You can find the records easily in online trading, while in offline trading it becomes
difficult sometimes to find the records
c) An online trading can be risky if you don’t have any knowledge of stock market as
you may end up buying wrong stocks and make a loss, while in offline trading broker
helps you to buy the right stock.
d) The chances of fraud are less in online trading by broker as you can handle your
own account whereas in offline trading chances of fraud by brokers are more.

What are the documents required to open an online trading account?

You need your identity proof and proof of residence to open an online trading account.
You also need to execute a member-client agreement for online trading by filling KYC
form which includes rights and obligation of online trading member.

How fund transfer takes place? Do I need to have internet banking and demat
account as well?

Funds can be transferred online through payment gateway, and update a buying limit
in your trading account. You can trade even if you do not have an internet banking
facility by submitting a cheque and buying limit will be provided to you. It is important
to have a demat account for trading online.
One can invest in equity shares, mutual funds and IPOs through online route.

National Stock Exchange - NSE Online Trading System

NSE's (National Stock Exchange) trading system is known as NEAT (National Exchange
for Automated Trading). It is a fully automated screen-based trading system, which
enables brokers and trading members around India to trade simultaneously. NEAT has
replaced the 'ring' and brokers no longer congregate on the floor of the exchange trade.
An investor is thus able to buy or sell securities through the brokers connected to NEAT
net work. The trading software selected by NSE is in use by several exchanges around the
world. The telecommunications network is the backbone ofits trading system designed to
provide continuous availability to the brokers. It is one of the largest interactive VSAT
(Very Small Aperture Terminals) based stock exchanges in the world. Broker- to -broker
is through online terminals. The terminals of the brokers on the wholesale debt market
are linked to the central computer. The brokers on the capital market trade through a
satellite network that is owned, operated and managed by NSE using VSAT (Very Small
Aperture Terminals) technology.

BSE Online Trading System ‘BOLT’

Bombay stock exchange (BSE) switched over from the open outcry trading system to a
fully automated computerized mode of trading known as BSE online Trading (BOLT)
system in 1995. This system which is both order and quote driven was commissioned on
14 March 1995 and in May 1995 it was introduced for all the securities listed on BSE. It
started with screen based trading and in September 1997, switched over to direct online
access facility. In the initial stage. BOLT was available to brokers of BSE based in Mumbai
through leased lines.
Objectives of Bolt

i. Automatic order matching and faster execution oftraders

ii. Eliminate the subjectivity ofthe existing trading system
iii. Facilitate more efficient procession
iv. Handle growing volumes easily
v. Increase market transparency

Salient features

i. The system allows complete transparent mode for each order execution.
ii. Trading hours been increased, under the open-outcry system trading was linked to
two hours.
iii. Processing speed coupled with extended trading hours has ensured that most
orders get executed on daily basis.
iv. Orders are matched in less than one-tenth of second.

Nation wide Expansion of ‘BOLT’

In the initial stages, BOLT was available to the brokers of the stock exchange based in
Mumbai. Experience of "BOLT” nationwide required. BSE secured SEBFs permission in
1997, and as a result, BSE brokers were free to install their trading terminals in cities
where no stock exchanges. However, at centers where the other exchanges are located.
BSE requires to sign a memorandum of understanding with them to be able to install the
BOLT terminals. In the first place, BSE signed a memorandum of understanding with 11
stock exchanges viz, Calcutta, Pune Ahmedabad, Sourashtra, Madhya Pradesh, Vadodara,
Bhubaneshwar and Magadh (Patnah) Jaipur, Coimbatore and Chennai (madras) to
provide BOLT connected to the brokers of these exchanges. This has since been extended
to over 200 cities. BSE added a nationwide network to its existing network. It opted for
the VSAT network technology for a number of reasons, including the availability of
satellite link through the indigenous INSAT satellite network.
 Mobile trading
Mobile trading system is financial software for Smartphones that enables investors to
make their buy or sell from a mobile phone that has internet connectivity.
The application helps the investors to do their financial tasks from anywhere and anytime.
The penetration of Smartphones and internet usage has made more and more people use
this application. Performance of the application depends on the quality of the app.
The shift from desktop computers and other trading terminals to mobile trading
applications have been largely driven by the ease of placing orders with an active eye on
the portfolio according to the current market prices. Almost all the brokerage houses have
their own mobile trading applications which are being monitored by the in-house
technical teams.
The challenges of online trading such as cost of computer hardware and software,
restricted mobility of laptops and desktops and lack of knowledge to operate the system
made way for mobile trading.

Mobile trading: Key benefits

Ease of placing orders: Market orders can be placed effortlessly on mobile trading
applications as compared to desktop terminals. No need to start up the big machines
again and again.
Live market data & portfolio: Mobile trading applications facilitate live market data
including stock indices, shares, currencies, commodities, derivatives, etc. The existing
portfolio can be reviewed on the mobile itself in no time. A user can take a brief idea about
the performance of the portfolio and the underlying assets.
Notification facility: Mobile trading applications do have the notification and alerts
facility which works independently from the SMS alerts sent by the exchanges, brokerages
and custodians. The notification facility keeps a user updated with the latest
developments in the portfolio and recommendations given by the brokerages.
Live related news: With the help of mobile trading applications, a customer can also
track live news related to a specific development or associated with a stock.
Research reports: Mobile trading applications also provide quick and easy access to
the research reports which are generated by the respective brokerage houses or firms.
Historical charts & analysis: Several premium mobile trading applications also
provide the facilities of historical stock prices, indices data and analytical tools on the
mobile trading applications.

Mobile trading: Key limitations

Restricted access: A large number of mobile trading applications have restricted access
which implies that there can be a number of barriers such as unavailability of derivative
products, currency products and data of international stock indices.
Smaller screen size: Small screen size is a big drawback for the users. A trading
platform usually contains a bunch of details which can’t be viewed with ease on a smaller
screen. However, this problem has been reducing steadily with the introduction of larger
screen sizes and trading applications for tablets.
Mobile connectivity: Connectivity on the mobile trading platform is another big issue
as the wireless signals may disrupt in remote areas and a number of hilly locations. A
disturbance in the mobile network at the time of placing an order may lead to a partial
loss of funds being transferred to the exchange or the brokerage firm.
Slow speed: Other than the high-end smartphones, most of the budget smartphones
don’t have a fast processor due to which the normal operations on the phone progress
with slow speeds. The lower processing speeds of the smartphone can lead to delay in
placing the orders as compared to the desktop terminals.

ALGO Trading

Algorithmic trading (also called automated trading, black-box trading, or algo-trading)

uses a computer program that follows a defined set of instructions (an algorithm) to place
a trade. The trade, in theory, can generate profits at a speed and frequency that is
impossible for a human trader.
The defined sets of instructions are based on timing, price, quantity, or any mathematical
model. Apart from profit opportunities for the trader, algo-trading renders markets more
liquid and trading more systematic by ruling out the impact of human emotions on
trading activities.
Algorithmic Trading in Practice
Suppose a trader follows these simple trade criteria:
• Buy 50 shares of a stock when its 50-day moving average goes above the 200-day
moving average. (A moving average is an average of past data points that smooths
out day-to-day price fluctuations and thereby identifies trends.)
• Sell shares of the stock when its 50-day moving average goes below the 200-day
moving average.
Using these two simple instructions, a computer program will automatically monitor the
stock price (and the moving average indicators) and place the buy and sell orders when
the defined conditions are met. The trader no longer needs to monitor live prices and
graphs or put in the orders manually. The algorithmic trading system does this
automatically by correctly identifying the trading opportunity.
Benefits of Algorithmic Trading
Algo-trading provides the following benefits:
• Trades are executed at the best possible prices.
• Trade order placement is instant and accurate (there is a high chance of execution
at the desired levels).
• Trades are timed correctly and instantly to avoid significant price changes.
• Reduced transaction costs.
• Simultaneous automated checks on multiple market conditions.
• Reduced risk of manual errors when placing trades.
• Algo-trading can be back tested using available historical and real-time data to see
if it is a viable trading strategy.
• Reduced the possibility of mistakes by human traders based on emotional and
psychological factors.
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