The Secondary Market

Concept of Secondary Market

Outstanding securities are traded in the secondary
market.

It is commonly known as stock market or stock exchange.

Equity shares, bonds, debentures and derivative products

are traded on the stock exchanges.

Well regulated and active stock market promotes capital

formation.

Growth of the primary market depends on the secondary

market.
Functions of Stock Exchange
Functions of the Stock exchange are:

 Maintenance of active trading

 Fixation of prices through supply and demand forces

 Ensuring safe and fair dealing

 Aiding in financing the industry

 Dissemination of information

 Inducing the company to perform well

 Regulatory Framework
Means framing regulations in order to govern the
activities of the stock exchanges and the members.

It is provided by the Securities Contract Regulation Act,

1956 and the Securities and Exchange Board of India
Act, 1992.

The regulatory structure consists of:

 Ministry of Finance
 Securities and Exchange Board of India
 The Governing Board
Members of Stock Exchange
 The Securities Contract Regulation Act, 1956 provides
certain regulations for the admission of an individual in
the stock exchange.

 Following are the qualifications an individual must possess

in order to become a member of the stock exchange:
 S/he must be 21 years of age.
 S/he should be a citizen of India.
 S/he should not be insolvent.
 S/he should not be convicted for malpractices.
 S/he should satisfy the capital adequacy norm.
 Types of Orders
The investors place the buying and selling
orders of shares with the members of the
stock exchange.
 Types of order:
 Market Order: It is the order when the stocks are
bought/sold at the market price and is executed
instantaneously.

 For example, assume that you want to buy 10 stocks of a

company is currently trading at the market price of Rs 90.
When you place the market order, you will buy the stocks
at market price i.e. Rs 90.

 Limit Order: This order refers to buying or selling the

stocks at a limit price.

 For the same example stated above, let’s assume that

now you want to buy the stocks at Rs 88. Then you can
place a limit order and once the market price of the stock
 Types of Orders
 Stop order:
 It is used by an investor to protect a profit or
limit a loss
 The investor specify what is known as stop
price
 If it is sell order- the stop price must be
below the market price prevailing at the time
of the order is placed
 If it is a buy order, the stop price must be
above the market price prevailing at the time
of placing the order.
 Types of Orders
 Stop order:
 Subsequently, if the market price reaches or
passes the stop price, the stop order will be
executed at the best available price
 It is a conditional market order
 Suppose an investor has 100 shares of a company
which were purchased at Rs.35 per share. The current
market price of the share is Rs.75. The investor thus has
earned a profit of Rs.40 per share on his share holdings.
He wants to protect this profit without foregoing the
opportunity of earning more profit if the price moves
still upwards

 This can be achieved by placing a sell order below the

current market price of Rs.75 for example at Rs.70 .
Now if the price falls to Rs.70 or below, the stop sell
order becomes a market order and it will be executed at
the best price prevailing in the market. Thus the
investor will be able to protect the profit of around Rs.35
per share. On the contrary if the market price of the
share move upwards, the stop sell order will not be
 Types of Orders
 Day order
 Open orders
 Till they are executed or specifically cancelled by
investor
 Fill or Kill orders
 Meant to be executed immediately or are to be treated
as cancelled
 Buying and Selling of
Shares
An investor, in order to buy or sell shares, must first
locate a registered broker.

The investor after locating the broker must place an

order specifying the number of shares he intends to

buy or sell.

The broker executes the order in his computer

terminal and matches the most appropriate order.


 Buying and Selling of
Shares

The broker, after finding an appropriate

order, delivers a contract note to the investor.

A contract note specifies the name of the

company, number of shares bought/sold,

price, brokerage and date of delivery of

shares.
 Rolling Settlement System
In rolling settlement, trades outstanding at the
end of the day have to be settled at the end of
T + X time framework.

 T + 5 settlement was introduced on 2nd July 2001

 T + 3 settlement was introduced on 1st April 2002
 T + 2 settlement was introduced on 1st April 2003
 TIMINGS
 How is the opening price of a share determined?

 The Indian stock market works for 5 days from

Monday to Friday. The normal trading session is
between 9:15 AM to 3:30 PM in both the major
stock exchanges of India- BSE, and NSE.

 However, before the normal trading session,

there is a small pre-opening session from 9:00
AM to 9:15 AM every day. This is the period when
the opening price of the shares is decided.

 But what happens during this period? And how is

 Pre-Opening session in a
market:
 The pre-opening session is divided into three segments- Order
collection period, order matching period and buffer period.

 Let us understand each one of them in details now.

 9:00 AM to 9:08 AM – This session is called Order Collection

period. You can place, modify and cancel your order during this
time period. However, no execution occurs during this period.

 9:08 AM to 9:12 AM – This is called order matching period or trade

confirmation order. You cannot place, modify or cancel your order
during this interval.

 Placed orders are executed during this period based on the price
identification method. This is also called equilibrium price
determination or Call auction.
 price of a share
determined?
 The opening price of the share is determined
during the call auction. As soon as the order
collection period is over, order matching period
starts.
 The order matching happens in the following
sequence:
 Eligible ‘limit’ orders are matched with eligible ‘limit’ orders.

 Residual eligible ‘limit’ orders are matched with ‘market’

orders.

 ‘Market’ orders are matched with ‘market’ orders.

 Now, let us understand how the opening
price is decided with the help of an example.
 Assume that during the order collection
period, following demand (buy orders) &
supply (sell orders) were available for
different stock prices for a company named
‘ABC’.
 Share PriceDemandSupply Maximum
Tradable Quantity
 100 1100 900 900
 101 800 1100 800
 102 1000 1200 1000
 103 500 600 500
 104 400 700 400
 The opening price is determined based on the
principle of demand and supply mechanism. It
occurs at the equilibrium price, where the maximum
volume (tradable quantity) is executable.
 If the above example, the maximum tradable quality
was possible at a share price of Rs 102.

Hence, Rs 102 will act as

the opening price for the
share.
 Online Trading
The Internet is used as a medium for the
trading of shares online.
In online trading, the orders of shares are
placed with the stock exchange through a
website.
The Securities and Exchange Board of India
(SEBI) has developed an Order Routing System
(ORS)
 In ORS, the requirements for the shares are
entered by the investor.
On execution of the order, the investor
receives the confirmation of the order.
Secondary Market
Overview of :
1.) Trading and Settlement.
2.) Order Management.
Transaction Cycle
Trading & Settlement
Process

Depository Investor

Clearing
Broker
House

Exchange
Contd…..
 Market Participants
 Exchange – NSE/BSE
 Depository – NSDL/CDSL
 Custodian
 Depository Participants
 Clearing Corporation – NSCCL/BOI share Holding
 Stock Broker
 A broker is an intermediary who arranges to
buy and sell securities on behalf of clients (the
buyer and the seller) also known as CM –
Clearing Member

 Sub –Broker
 Investors
 Trading At NSE
 The trading on stock exchanges in India used to
take place through open outcry
 NSE introduced a nation-wide on-line fully-
automated screen based trading system NEAT)
 Electronically matches orders on a strict
price/time priority
 Order Placement
NSE has main computer which is connected
through Very Small Aperture Terminal
(VSAT) installed at its office.
Brokers have terminals (identified as the
PCs in the Figure 1) installed at their
premises which are connected through
VSATs/leased lines/modems.
An investor informs a broker to place an
order on his behalf. The broker enters the
order through his PC, which runs under
Windows NT and sends signal to the
Satellite via VSAT/leased line/modem. The
signal is directed to mainframe
 Contd …..
 The order confirmation message is immediately
displayed on the PC of the broker.
 This order matches with the existing passive
order(s), otherwise it waits for the active orders
to enter the system.
 On order matching, a message is broadcast to
the respective member.
 Contd ….
All orders received on the system are sorted with
the best priced order getting the first priority for
matching i.e., the best buy orders match with the
best sell order.
Similar priced orders are sorted on time priority
basis, i.e. the one that came in early gets priority
over the later one.
Orders are matched automatically by the computer
keeping the system transparent, objective and fair.
Where an order does not find a match, it remains
in the system and is displayed to the whole market,
till a fresh order comes in or the earlier order is
cancelled or modified.
 Order Matching
 Matching Priority: The best sell order is the order with the lowest
price and a best buy order is the order with the highest price. The
unmatched orders are queued in the system by the following priority:

 (a) By Price: A buy order with a higher price gets a higher priority and
similarly, a sell order with a lower price gets a higher priority. E.g.
Consider the following buy orders:

 1) 100 shares @ Rs. 35 at time 10:30 a.m.

 2) 500 shares @ Rs. 35.05 at time 10:43 a.m.

 The second order price is greater than the first order price and
therefore is the best buy order.
By Time: If there is more than one order at the same
price, the order entered earlier gets a higher priority. E.g.
Consider the following sell orders:

1) 200 shares @ Rs. 72.75 at time 10:30 a.m.

2) 300 shares @ Rs. 72.75 at time 10:35 a.m.

Both orders have the same price but they were entered in
the system at different time. The first order was entered
before the second order and therefore is the best sell
order.
 Clearing & Settlement
 The clearing and settlement mechanism in
Indian securities market has witnessed
significant changes and several innovations
during the last decade.
 T+2 rolling settlement has now been introduced
for all securities. The members receive the
funds/securities in accordance with the pay-
in/pay-out schedules notified by the respective
exchanges.
 Contd …..
 The obligations of members are downloaded to
members/custodians by the clearing agency
 The members/custodians make available the
required securities in their pool accounts with
depository participants (DPs) by the prescribed
pay-in time for securities.
 Contd …
 The depository transfers the securities from the
pool accounts of members/custodians to the
settlement account of the clearing agency.
 The securities are transferred on the pay-out
day by the depository from the settlement
account of the clearing agency to the pool
accounts of members/custodians.
Settlement Process in CM
segment of
NSE
 Process
(1) Trade details from Exchange to NSE Clearing Ltd ,
(real-time and end of day trade file).

(2) NSE Clearing notifies the consummated trade

details to CMs/custodians who affirm back. Based on the
affirmation, NSE Clearing applies multilateral netting
and determines obligations.

(3) Download of obligation and pay-in advice of

funds/securities.

(4) Instructions to clearing banks to make funds

available by pay-in time.
 Process

(6) Pay-in of securities (NSE Clearing advises depository to

debit pool account of custodians/CMs and credit its account
and depository does it).

(7) Pay-in of funds (NSE Clearing Ltd advises Clearing Banks

to debit account of

custodians/CMs and credit its account and clearing bank

does it).

(8) Pay-out of securities (NSE Clearing Ltd advises depository

to credit pool account of custodians/CMs and debit its
 Process
(9) Pay-out of funds (NSE Clearing advises Clearing Banks to
credit account of custodians/CMs and debit its account and
clearing bank does it).

(10) Depository informs custodians/CMs through DPs.

(11) Clearing Banks inform custodians/CMs.

 Flow: Trade Processing
Order confirm
Trade Details
Exchange Clearing Corporation Clearing Banks Depository DP

Customer Broker
Trading Terminal
Place order
Security
Enters order Transfer

Funds Availability Security Availability

Obligation report

Security transfer
Security transfer CC a/c
To CM pool acct
 Auctions
Initiated by Exchange on behalf of trading members for settlement

related reasons.

On the securities pay-in day, NSE Clearing identifies short deliveries


and the respective clearing member is debited by an amount

equivalent to the securities not delivered by him and valued at a

valuation price

NSE Clearing conducts a buying-in auction for security shortages on


the day after the pay-out day through the NSE trading system. If the

buy-in auction price is more than the valuation price, the member is

required to make good the difference.