E-Commerce in Security Market By M.

SANGEETHA

E-COMMERCE IN SECURITY MARKET

(Source: Most of the Data & charts from NSE website)

(A)

ABOUT E-COMMERCE

World Trade Organisation (WTO) defines E-Commerce as the production, distribution, marketing, sale or delivery of goods and services by electronic means. The strategic benefit of making a business e-commerce enabled, is that it helps reduce the delivery time, labour cost and the cost incurred in the following areas: Document preparation Error detection and correction Reconciliation Mail preparation Telephone calling Data entry Overtime Supervision expenses

Further, it enables

Easy reach to a fast growing online community Unlimited shelf place for products and services Fuse the global geographical and time zone boundaries Reach national and global markets at low operating costs

The sudden spurt in growth of e-commerce in India is felt due to the following favourable factors: Rapidly increasing Internet user base Technology advancements such as VOIP (Voice-over-IP) have bridged the gap between buyers and sellers online

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The emergence of blogs as an avenue for information dissemination and two-way communication for online retailers and E-Commerce vendors Improved fraud prevention technologies that offer a safe and secure business environment and help prevent credit card frauds, identity thefts and phishing Longer reach - Consumers in the Tier II & Tier III cities are fast realizing the potential of the Internet as a transacting medium The young population find online transactions much easier

(B) ENTRY OF E-COMMERCE IN SECURITY MARKET Stock market is a trading platform which provides an opportunity to buyers and sellers of securities to do transactions. Stock markets all over the world have realized the potential of IT and have moved over to electronic trading systems, which are cheaper, have wider reach and provide a better mechanism for trade and post-trade execution. In 1992, the SEBI Act was enacted giving SEBI statutory status as an apex regulatory body. And a series of reforms was introduced to improve investor protection, automation of stock trading, integration of national markets, and efficiency of market operations. One major policy initiated by SEBI from 1993 involved the shift of all stock exchanges to screen-based trading, motivated primarily by the need for greater transparency. At this point of time, a paradigm shift from the hitherto followed physical trade in securities has happened and electronic trade has gained momentum. The three noticeable changes that made it possible are Noticeable changes in Security Market

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(3) Shortening of trading and settlement cycles

(1) Dematerialisation

(2) Introduction of Screen based trading

The Depositories Act was passed by the Parliament in 1995 and this paved the way for conversion of physical securities into electronic format. With establishment of National Stock Exchange, there was a significant change in the level of technology used for the operation of stock market. It led to the introduction of Screen Based Trading, thereby removing the earlier system of open outcry where prices of securities were quoted by symbols. Now, all the transactions happen with the help of a sophisticated electronic network which is spread across country and connected to National Stock Exchange through VSAT. These two factors combined together helped in reducing the trading and settlement cycle in Indian securities market which got reduced from as long as 22 days to 2 days currently. The first exchange to be based on an open electronic limit order book was the National Stock Exchange (NSE), which started trading debt instruments in June 1994 and equity in November 1994. In March 1995, BSE shifted from open outcry to a limit order book market. Currently 17 of Indias stock exchanges have adopted open electronic limit order.

(C) TECHNOLOGY AND APPLICATION SYSTEMS IN NSE

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Since National Stock Exchange of India Ltd (NSE) is the pioneer Stock Exchange to become E-Commerce enabled in India, most of the data and charts for the theme on E-Commerce in Securities Market are sourced from NSE website www.nseindia.com.

Important events in the history of NSE

1994 Commenced operations in WDM

segmen t
2000 Commenced operations in F&O April 1993 Recognized as Stock Exchange 1994 Commenced operations in CM

Segme nt

Segme nt

Technology has been the backbone of the Exchange. Providing the services to the investing community and the market participants using technology at the cheapest possible cost has been its main thrust. NSE chose to harness technology in creating a new market design. It believes that technology provides necessary impetus for the organization to retain its competitive edge and ensure timeliness and satisfaction in customer service. In recognition of the fact that technology will continue to redefine the shape of the securities industry, NSE stresses on innovation and sustained investment in technology
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to remain ahead of competition. NSE is the first exchange in the world to use satellite communication technology for trading. It uses satellite communication technology to energize participation from about 2,527 VSATs from nearly 186 cities spread all over the country (Data as of 31.03.2010). Its trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art client server based application. At the server end all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. It has uptime record of 99.999%. For orders entered by the user, the response time within trading system is around 5mts. NSE has been continuously undertaking capacity enhancement measures so as to effectively meet the requirements of increased users and associated trading loads. NSE has also put in place NIBIS (NSEs Internet Based Information System) for on-line real-time dissemination of trading information over the Internet. (i) VSAT VSAT is the acronym for Very Small Aperture Terminal. A type of two-way satellite that transmits both narrow and broadband data to satellites in orbit. The data is then redirected to other remote terminals or hubs around the planet. VSATs are mainly used for wireless transmission of real-time data. The National Stock Exchange (NSE) in India is one of the largest VSAT based exchanges in the world. Supporting more than 3,000 terminals, the NSE network is the largest private wide-area network in the country. The NSE uses real-time online application, which is supported by 15 computer systems, including nonstop, fault-tolerant computers and high-end UNIX servers. (ii) Internet based trading services NSE is also offering internet based trading services to NSE members. This facility is branded as NOW Neat on Web NOW provides an internet portal for NSE members and their authorized clients to transact orders and trades to the various market of NSE viz. CM, F&O, WDM and Currency. The members can also access NOW through their existing VSAT/ Leased line, in addition to internet links. The various features provided by NOW are (a) comprehensive

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Administration features, flexible risk management system, high speed dealer terminals and online trading facility for investors. (iii) Trading through Mobiles In September 2010, NSE had facilitated trading through Mobiles. With this move, NSE hopes to use the same medium to ensure investor protection. Now all investors who are registered on the Exchange website would receive an SMS on the designated mobile number, at the end of each trading day, giving a summation of the trading activity. Besides, an email would also be sent on the registered email id, providing the trading details. This is in addition to the existing facility of verifying trade details from the Exchange website.

(D) MARKET SEGMENTS AND PRODUCTS NSE provides a trading platform for all types of securities for investors under one roof Equity, Corporate Debt, Central and State Government Securities, T-Bills, Commercial Paper (CPs), Certificate of Deposits (CDs), Warrants, Mutual Funds (MFs) units, Exchange Traded Funds (ETFs), Derivatives like Index Futures, Index Options, Stock Futures, Stock Options Currency Futures and Interest Rate Futures. The Exchange provides trading in different segments viz., Wholesale Debt Market (WDM) segment, Capital Market (CM) segment, Futures & Options (F&O) segment, Currency Derivatives Segment (CDS), etc. (i) Capital Market Segment The Capital Market segment offers a fully automated screen based trading system, known as the National Exchange for Automated Trading (NEAT-CM). The NEAT CM application has a split architecture wherein the split is on the securities and users. The application runs on three Stratus systems with communication over TCP IP protocol. The application has been benchmarked to support 60,000 users and handle more than 30 million trades daily. This application also provides data feed for processing to some other systems like Index, OPMS (Online Position Monitoring System) through TCP/IP. This is a direct interface with the trading members of the CM segment of the Exchange
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for entering the orders into the main system. There is a two way communication between the NSE main system and the front end terminal of the trading member. Various types of securities e.g. equity shares, warrants, debentures/ notes as well as retail Gilts are traded on this system. In the year 2009-10, the trading volumes increased by 50.36 % to Rs.4,138,023 crore (US $ 916,709 million) from Rs.2,752,023 crore (US $ 540,142 million) during 2008-09. The average daily trading volume increased from Rs.11,325 crore (US $ 2,223 million) during 2008-09 to Rs.16,959 crore (US $ 3,757 million) during 2009-10. The remarkable aspect was that the trading volumes in the year 2009-10 showed a growth of 16.53 % over the trading volumes witnessed in 2007-08.

Business Growth of CM Segment from 1994-95 till 2009-10

(ii) F&O Segment The derivatives trading system at NSE is called NEAT-F&O trading system. It provides a fully automated screen-based trading for all kind of derivative products available on NSE on a nationwide basis. NEAT-F&O is a direct interface with the trading members of the F&O segment of the Exchange for entering the orders into the main system. There is a two way communication between the NSE main system and the front end terminal
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of the trading member. Futures & Options (F&O) segment of NSE provides trading in derivatives instruments like Index Futures, Index Options, Stock Options, Stock Futures. The F&O segment of NSE has made a mark for itself globally. In the F&O segment, trading in S&P CNX Nifty Index, CNX IT index, Bank Nifty Index, Nifty Midcap 50 index and single stocks are available. Trading in Mini Nifty Futures & Options and Long term Options on S&P CNX Nifty are also available. The average daily turnover in the F&O Segment of the Exchange during 2009-10 was Rs.72,392 crore (US $ 16,097 million).

Business Growth of F&O Segment from 2000-01 till 2009-10

(iii) Wholesale Debt Market The WDM trading system at NSE is called NEAT-WDM. It enables members across the country to trade simultaneously with enormous ease and efficiency. It supports an anonymous order driven market which operates on a price/time priority and provides tremendous flexibility to users in terms of orders with various time/price/quantity related conditions that can be placed on the system. It also provides on-line market information like total order depth, best buys and sells available, quantity traded, the high, low and last traded price for securities are available at all points of time.

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The WDM Trading system provides two market sub-types: continuous market and negotiated market. In the continuous market, the buyer and seller do not know each other and they put their best buy/sell orders, which are stored in order book with price/time priority. If orders match, it results into a trade. The trades in WDM segment are settled directly between the participants, who take an exposure to the settlement risk attached to any unknown counter- party. In the NEAT-WDM system, all participants can set up their counter-party exposure limits against all probable counter-parties. This enables the trading member/participant to reduce/ minimize the counter-party risk associated with the counter-party to trade. A trade does not take place if both the buy/ sell participants do not invoke the counter-party exposure limit in the trading system.

In the negotiated market, the trades are normally decided by the seller and the buyer outside the exchange, and reported to the Exchange through a trading member for approval. Thus, deals negotiated or structured outside the exchange are disclosed to the market through NEAT-WDM system. In negotiated market, as buyers and sellers know each other and have agreed to trade, no counter-party exposure limit needs to be invoked. This segment provides a trading platform for a wide range of fixed income securities that includes Central government securities, treasury bills (T-bills), state development loans (SDLs), bonds issued by public sector undertakings (PSUs), floating rate bonds (FRBs), zero coupon bonds (ZCBs), index bonds, commercial papers (CPs), certificates of deposit (CDs), corporate debentures, SLR and non-SLR bonds issued by Financial Institutions (FIs), bonds issued by foreign institutions and units of Mutual Funds (MFs). Business Growth of WDM Segment from 1994-95 till 2009-10

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(iv) Currency Derivatives Segment The Currency derivatives trading system of NSE, called NEAT-CDS trading system, provides a fully automated screen-based trading for currency futures on a nationwide basis as well as an online monitoring and surveillance mechanism. Two products, currency futures and interest rate futures trade on this segment. The NEAT-CDS system supports an order driven market, wherein orders match automatically. Order matching is essentially on the basis of security, its price and time. All quantity fields are in contracts and price in Indian rupees. The exchange notifies the contract size and tick size for each of the contracts traded on this segment from time to time. When any order enters the trading system, it is an active order. It tries to find a match on the opposite side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and sits in the respective order book in the system. NSE commenced operations on CDS on August 29, 2008 with the launch of Currency Futures Trading in US Dollar-Indian Rupee (USD-INR). On the very first day of operations a total number of 65,798 contracts valued at Rs.291 crore were traded on the Exchange. Since then trading activity in this segment has been witnessing a rapid growth. Trading in Currency Futures contracts in other pairs- Euro-INR, Pound SterlingINR and Japanese Yen-INR commenced on February 01, 2010. The average

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daily turnover in the Currency Futures during 2009-10 was Rs.7,428 crore (US $ 1,646 million). Trading in Interest Rate Futures (IRF) commenced on August 31, 2009. Interest Rate Futures contracts are based on 10 year 7% Notional GOI Bond. On its first day of trading, 14,559 contracts were traded with a total value of Rs.267.31 crores. Business Growth of CD Segment from Sep.2008 till Mar.2010

(v) Segment-wise Trading value Segment-wise Trading value (Period considered 2006-07 till 2009-10) Segment/Year CM F&O WDM Currency Futures Interest Rate Futures Total 2006-07 1945287 2007-08 3551038 2008-09 2752023 2009-10 4138023

7356271 13090478 11010482 17663665 219106 --282317 --335952 162272 -563816 1782608 2975

9520664 16923833 14260729 24151088

(vii) Mutual Fund Service System

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In November 2009, SEBI allowed transaction in Mutual Fund schemes through the Stock Exchange infrastructure. Consequent to this market development, NSE launched Indias first Mutual Fund Service System (MFSS) on November 30, 2009 through which an investor can subscribe or redeem units of a mutual fund scheme. MFSS is an online order collection system provided by NSE to its eligible members for placing subscription or redemption orders on the MFSS based on orders received from the investors. This has made buying and selling of mutual funds easier for investors. The subscription/redemption request would thereafter get processed and investor would know about status of the request only in the form of direct communication from Mutual Fund/AMC/RTA. The NSE MFSS facilitates entry of both buy and sell orders. With the MFSS, investors can place an order through a registered NSE member who is eligible to participate in MFSS for subscription/redemption of units. In order to subscribe units, members are required to place buy orders. A member who wishes to redeem units of mutual fund scheme will be required to place sell orders in the system. Participants can choose between physical mode and depository mode while putting their subscription / redemption requests on the MFSS. All orders are settled on order to order basis, on T+1 (working days).

As many as 17 fund houses have joined the NSE MFSS Platform and as on March 31, 2010 there were 908 sub schemes available for trading. During November 2009 to March 2010, there were 2,392 orders placed for subscription worth Rs.91,932,291 and 274 orders worth Rs.26,217,352 were redeemed.

(vi) Multi-market front end application NSE is offering a multi-market front end application NEATPlus to its members. This application provides a common trading platform to NSE members to trade in Capital Market as well as Futures and Options Market segments at NSE. Members can take login in CM and F&O segments in a single terminal with
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ability to monitor and trade in Equity securities as well as Equity derivatives from single screen. Members can use the existing VSAT/Leased Line connectivity for accessing the NEATPlus application. Multiple market watch screens with Excel like features, ability to select various fonts, customizable color schemes and themes are some of the other salient features of the NEATPlus application.

(E) NSE STATISTICS AFTER E-COMMERCE ENABLED If India is able to attract huge investments in securities now, it is not only because of the inherent strength of the economy but also due to the advancement of the stock markets that made outsiders to understand the process in Indian market easily.

(i) Achievements (Figures as on March 31, 2010)

(ii) Internet Trading At the end of March 2010, a total number of 363 members were permitted to allow investors web based access to NSEs trading system. The members of the exchange in turn had registered 5,143,705 clients for web based access as
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on March 31, 2010. During the year 2009-10, 11.13% of the trading value in the Capital Market segment (Rs.692,789 - US$ 135,974 million) was routed and executed through the internet. The table below shows the growth of internet trading in the CM segment from the fiscal years 2006-07 till 2008-09. Internet trading in the CM segment of NSE Year Enabled Members* Registere d Clients Internet Trading Volume (Rs.cr) 337524 668399 692789 921380 Internet Trading Volume (US$ mln) 77432 167225 135974 204116 % of totall trading volume 17.35 18.82 25.17 11.13

2006-07 2007-08 2008-09 2009-10

242 305 349 363

2279098 4405134 5627789 5143705

* At the end of the financial year Trading volumes are calculated as buy side + sell side turnover

The chart below shows the growth of Internet trading volumes from the fiscal years 2006-07 till 2008-09 in the CM segment of NSE in comparison with the total traded volumes at NSE is furnished below. Internet Trading volumes in CM Segment in comparison with total trading volumes

(iii)

Market Capitalisation

The total market capitalisation of securities available for trading on the CM segment increased from Rs.363,350 crore (US$ 115,606 million) as at end
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March 1995 to Rs.6,009,173 crore (US$ 1,331,230 million) as at end March 2010. The Market capitalization witnessed an increase of 107.49 % during 2009-10 as compared to the market capitalization of Rs.2,896,194 crore (US$ 568,439 million) in 2008-09. As compared with 2007-08, the market capitalization in 2009-10 increased by 23.69%. The market capitalisation ratio of NSE was 97.49% as of March 31, 2010. (iv) Records reached

The growth in the stock market activity across the different market segments and highest attained records is visible from the below facts and figures. Parameter Capital Market Segment: Number of trades Traded Quantity Turnover Market capitalization S&P CNX Nifty Index value CNX Nifty Junior Index value Futures & Options Segment: Number of trades Number of Contracts traded Turnover Currency Derivatives Segment (Currency Futures): Number of trades Number of Contracts Traded Turnover Wholesale Debt Market Segment: Turnover
Note: Data from inception to March 31, 2010

Date May 19,2009 May 19,2009 May 19,2009 January 07,2008 January 08,2008 January 04,2008 January 28, 2008 January 28,2008 January 28,2008

Magnitude 11260392 19225.95 lakh Rs.40151.91 cr Rs.6745724 cr 6357.10 13209.35 1971214 6300279 Rs.166193.03 cr

January 11,2010 March 30,2010 March 30,2010

78935 4353053 Rs.19927 cr

August 25,2003

Rs.13911.57 cr

(F)

FOREIGN INSTITUTIONAL INVESTMENTS IN EQUITY AND DEBT

RBIs general permission under FERA could enable the registered FII to buy, sell and realise capital gains on investments made through initial corpus
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remitted to India, to invest on all recognised stock exchanges through a designated bank branch, and to appoint domestic custodians for custody of investments held. As of March 2009, there were 1,626 FIIs registered with SEBI for dealing in Indian Security Market. Foreign Institutional Investors (FIIs) were allowed to invest in the Indian capital market securities from September 1992. However investment by them were first made in January 1993. The Indian Gilts market was opened up for FII investment in April 1998. Till December 1998, investments were related to equity only as investments in debt were made from January 1999. FIIs continued to invest large funds in the Indian securities market. For two consecutive years in 2004-05 and 2005-06, net investment in equity showed year-on-year increase of 10% to 11%. Highest net investment in equity by FIIs was seen in 2007-08 of Rs. 534,038 million (US $ 13,361 million) an increase of 112% over the 2006-07 net investment figure of Rs 252,370 million (US $ 5,790 million). During 2008-09, highest net outflows in equity (since 2001-02) was Rs.477,070 million (US $ 9,363 million) and inflow of Rs.18,950 million (US $372 million) in debt instruments.

(G) INDIA & WORLD MACRO ECONOMIC FACTS - 2009 On a broader scale, among nations, India is positioned as a nation with a strong savings rate, with a large penetration of mobile telephones. These and certain other salient macroeconomic facts are presented in the following table. India & World Macroeconomic Facts Parameter GDP ($ trn 2009 Est.) Population (in bn 2009) Market Cap. ($ bn- Dec.2009) Gross household savings rate as % of
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US 14.4 0.3 11838 (NYSE) 4.4%

UK 2.2 0.06 2796 (LSE) 2.5%

China 4.3 1.3 2705 (SSE) 28%

India 1.2 1.12 1306 (BSE) 32%

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disposable income (2008) No. of tax payers (in mn -2007) No. of mobile phones (in mn 2009) No. of internet users (in mn -2009) 134 270 230 32 75 50 NA 650 30 32 550 80

Source:www.CIA.gov, www.world-exchanges.org and Others

Conclusion The macroeconomic facts about India hosted in the website www.worldexchanges.org reveals that a sizeable number of Indian population have heightened household savings rate (32% in 2008) as compared to some comparable nations. It also reveals facts about increased usage of latest technologies among people, such as mobile phone (550 mln in 2009) and internet (80 mln in 2009).

Urge for money multiplication in short span of time is picking up fast among Indian population in this electronic era. Securities market works as an investment vehicle for those people to make short coverings and for purpose of investing for short term and long term duration. Basic attractions for the securities market are growing internet user population (80 mln in 2009) and extension of online trading facilities by stock exchanges. Online availability of company performance guided by SEBI corporate governance norms, convenience of online trading even from ones home and availability of online brokers at affordable commission are sweet news for investors who trade through internet. This route also pushes up the growth of security market. This is evidenced from the Y-o-Y growing market capitalization. S.Cecily Author
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M.Sangeetha Co-Author
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