Secondary Markets

Module 3B

Stock Exchange

The Securities Contract (Regulation) Act, 1956

[SCRA] defines Stock Exchange as any body of
individuals, whether incorporated or not,
constituted for the purpose of assisting,
regulating or controlling the business of buying,
selling or dealing in securities.

Market Segments
Market
Segments

Wholesale
Debt
Market

State and
Central
Government
securities
T - Bills
Corporate
Debentures
CPs
CDs etc.

Capital Market

Equity shares
Warrants
Debentures
Mutual funds
ETFs

Futures &
Options

Index Futures
Index Options
Single Stock
Futures
Single Stock
Options

Currency
Derivatives

Currency
Futures
Interest Rate
Futures

Market Participants
Market
Participants

Investor
s
Individuals
Corporates
FIIs
FIs
Mutual Funds
etc.

Issuers
Goverments
Corporates

Intermediarie
s
Stock
Exchanges
Stock Brokers
Depositories
DPs
Merchant
Bankers
Custodians
Underwriters
VC Funds
Mutual Funds

Market regulation - SEBI

The Securities and Exchange Board of India (SEBI) is the

regulatory authority in India established under Section 3
of SEBI Act, 1992.
SEBI Act, 1992 provides for establishment of Securities
and Exchange Board of India (SEBI) with statutory powers
for : Investors

SEBIs powers
SEBI has authority and powers over -

Regulating the business in stock exchanges and any other securi

Stock exchanges

Stock Brokers

A stock broker is an intermediary who arranges to

buy and sell securities on the behalf of clients (the
buyer and the seller).
According to SEBI (Stock Brokers and Sub-Brokers)
Regulations, 1992, a stockbroker is member of a
stock exchange and requires to hold a certificate
of registration from SEBI in order to buy, sell or
deal in securities.

NSE Membership

There are no entry/exit barriers to the membership of NSE.

Anybody can become a member by complying with the prescribed eligibility criteria
and exit by surrendering membership.

Members are admitted to different segments such as CM, F&O, WDM etc.

Members have access to a nation-wide trading facility for equities, derivatives, debt
and hybrid instruments / products.

Broker-Clients Relations
Trading access UCC
Risk management
Margin money
BROKER

CLIENT

Trade confirmation
Contract note
Transaction
charges STT and
brokerage

CLIENT A
ACCOUNT
(FUNDS)

CLIENT B
ACCOUNT
(FUNDS)

BROKERs ACCOUNT
(FUNDS)
CLIENT C
ACCOUNT
(FUNDS)

CLIENT D
ACCOUNT
(FUNDS)

CLIENT A
ACCOUNT
(DEMAT)

CLIENT B
ACCOUNT
(DEMAT)

BROKERs ACCOUNT
(DEMAT)
CLIENT C
ACCOUNT
(DEMAT)

CLIENT D
ACCOUNT
(DEMAT)

Broker-Clients Relations - Brokerage

Brokerage :
Maximum brokerage chargeable by a TM to his client
is 2.4%.
For example: If a client has sold 20000 shares of a
scrip
@ Rs. 50, what is the maximum brokerage that the
client
can be charged?
In this case, the maximum brokerage =
brokerage rate*value of the transaction
=2.5 %*( 20000 shares*Rs. 50) = Rs. 25,000

Securities Transaction Tax

(STT)

STT is levied on all transactions of sale and / or

purchase of equity shares and units of equity
oriented fund and sale of derivatives entered into
in a recognized stock exchange.

Particulars

Rate
(%)

For Delivery based transactions

- Both Buyer and Seller need to pay on the value of
transaction

0.125

For non-delivery based transactions

0.025

Transaction Charges Capital markets

Total Traded Value in a month

Up to First Rs. 1250 cores

Transaction Charges (Rs.

Per Lakh of Traded Value)
Rs. 3.25 each side

More than Rs. 1250 crores upto Rs. 2500 Rs. 3.20 each side
crores (on incremental volume)
More than Rs. 2500 crores upto Rs. 5000 Rs. 3.15 each side
crores (on incremental volume)
More than Rs. 5000 crores upto Rs.
10000 crores (on incremental volume)

Rs. 3.10 each side

More than Rs. 10000 crores upto Rs.

15000 crores (on incremental volume)

Rs. 3.05 each side

Exceeding Rs. 15000 crores

Rs. 3.00 each side

The Depository System

DEPOSITORIES

CLIENT

NSDL

CDSL

DP

DP

CLIENT

Depositories investor account

opening
Forms

Depositories
It is not mandatory for an investor to have a
demat account but advisable for ease of trading.
If an issue size is above Rs. 10 crs., securities can
be issued by the company only in demat form.
In book built issues allotment would only be made
in demat form in the case of QIBs and investors
applying for more than 1000 shares.
Once demat account is opened, the investor can
sell securities in the market or transfer securities
to anyone by giving appropriate instructions to
the DP.
On purchase, securities automatically credited to
the demat account.

Advantages of Depository
system

Safe and convenient way to hold securities.

Immediate transfer of securities.
No stamp duty on transfer.
Elimination of fake, forged shares.
Reduction in paper work.
No postage, courier costs.
Change in address registered with DP gets recorded
with all companies where investor holds shares.
Automatic credit to demat account when new shares
are issued on account of bonus, rights etc.

Dematerialisation
The process of converting physical securities into
electronic form is called as dematerialisation.
Investors need to fill Demat Request Form (DRF)
and submit alongwith physical shares to the DP.
DP intimates Depository through the system.
DP submits certificates to the Registrar.
Registrar confirms the demat request with the
Depository.
Registrar dematerialises certificates, updates
accounts, informs Depository.
Depositor updates accounts, intimates DP
DP updates accounts, informs investor.

Rematerialisation
Reconverting shares into physical form from
electronic form.
Investor requests for remat by filling up the
Remat Request Form (RRF) and submitting to DP.
DP intimates depository through system.
Depository confirms request to the registrar.
Registrar updates account, prints certificate.
Depository updates accounts, intimates DP.
Registrar despatches certificates to the investor.

Depository system
In case of purchase of shares :
Broker receives securities in his account on the
payout day.
Broker gives instructions to DP to debit his
account and credit investors account.
In case of Sale shares :
Seller gives delivery instructions to DP to debit
own account an credit brokers account.
Such instructions should reach the DP atleast 24
hrs. before pay-in.

Market Timings
Normal Market
Open: 09:15
Auction Market
Open: 12:00
Block Deal segment
Open: 09:00
Post Close Market
Open: 15:50

Close: 15:30

Close: 09:35
Close: 16:00

Trading styles
Open outcry system
Time consuming
Inefficient
Opaque

Screen Based Trading

system
Improves operational efficiency.
Increases the informational
efficiency of markets.
Improves the depth and liquidity of
the market.
Equal access to everybody.
Audit trail

Order management
Order
Management

Order
entry

Order
modification

Order
cancellatio
n

Order
matching

Order Management

Orders can be entered in the normal market, odd lot,

RETDEBT and auction market.
For placing order invoke Buy or Sell screen
When the user invokes the order entry screen, the fields
that are taken as default are :

Symbol, Series and Book Type

Qty - Regular lot quantity available at best price on counter side
Price - Price of best counter order
Pro - Trading member ID of the user
Order Duration - Day
Disclosed quantity - Fully Disclosed
Participant ID - Trading member ID of the user

Order Management
Active Order When any order enters into
the system, it is an active order. If it finds
a match trade takes place.
Passive Order An order which has
entered into the system, does not find a
match and is sitting in the system.

Order Management
When orders enter the trading system, they are first numbered,
time stamped and then scanned for a potential match.
Each order has a distinctive order number and a unique time stamp
If a match is not found, then the orders are stored in the books as
per the price/time priority.
Price priority means that if two orders are entered into the system,
the order having the best price gets the higher priority.
Time priority means if two orders having the same price is entered,
the order that is entered first gets the higher priority.
Best price for a sell order is the lowest price and for a buy order, it
is the highest price.

Order Management
The best buy order is the order with the highest price
and best sell order is the order with lowest price.
BID (BUY)
Qty.
1000
500
550

Price (Rs.)
50.25
50.10
50.05

ASK (Sell)
Price
Qty.
50.35
2000
50.40
1000
50.50
1500

Order Management

The different order books in the NEAT system :

Regular Lot Book: An order that has no special condition associated
with it is a Regular Lot order.
Stop Loss Book: Stop Loss (SL) orders are released into the market
when the last traded price for that security in the normal market
reaches or surpasses the trigger price.

Negotiated Trade Book: Two trading members can negotiate a trade

outside the Exchange. To regularise the trade, each trading member
has to enter the respective order in the system.

Odd Lot Book: The Odd Lot book can be selected in the order entry
screen in order to trade in the Odd Lot market.

Auction Order Book: Auction order book stores orders entered by

the trading members to participate in the Exchange initiated auctions.

Stop Loss orders

Sell :
Current Market Price : Rs. 100
Stop Loss Order Trigger Price : Rs. 95
Stop Loss Order Limit Price : Rs. 94

As soon a market reaches Rs. 95, the stop loss order gets
triggered and is released in the regular order book with a
limit price of Rs. 94. Current Price = Rs. 100
Trigger Price = Rs. 95
Limit Price = Rs. 94

Order Management
Quantity Freeze :
If an order comes with any of the above limits a
warning
message is sent to the broker terminal 0.5% of the issue size of the security
Value of order around Rs. 2.5 crs.
Quantity more than 25000, irrespective of issue
size, which ever is less

Order Management
Order Types and Conditions
(i) Time Conditions
DAY:
All orders entered into the system are currently
considered as Day orders only.
IOC:
An Immediate or Cancel (IOC) order allows the user to
buy or sell a security as soon as the order is released
into the system, failing which the order is cancelled from
the system.
Partial match is possible for the order, and the
unmatched portion of the order is cancelled
immediately.

Order Management
Order Types and Conditions
(ii) Quantity Conditions
DQ:
An order with a Disclosed Quantity (DQ) allows the user
to disclose only a portion of the order quantity to the
market.
For e.g. if the order quantity is 10,000 and the disclosed
quantity is 2,000, then only 2,000 is released to the
market.
After this quantity is fully matched, a subsequent
quantity of 2,000 is disclosed.
Thus, totally five disclosures with the same order
number are shown one after the other in the market.

Order Management
Order Types and Conditions
(iii) Price Conditions
Market:
Market orders are orders for which price is specified as
'MKT' at the time the order is entered. For such orders,
the system determines the price.
Limit order:
Specify prices at which buy or sell orders are executed.
Stop-Loss:
This facility allows the user to release an order into the
system, after the market price of the security reaches or
crosses a threshold price called trigger price.

Order Management
Order Types and Conditions
(iv) Other Conditions

Proprietary (PRO) / Client (CLI):

A user can enter orders on his own account or on behalf
of clients.

Participant Code:
In case of Pro order by default, the system displays the
trading member ID of the user in the participant field.
In case of Cli order if Participant ID exist in client
master maintenance the same will appear in participant
filed, else trading member ID will be reflected.

Order Management

Order modification :
All orders can be modified in the system till the time
they do not get fully traded and only during market
hours and pre-open stage.
Hierarchy for performing order modification
functionality:
A dealer can modify only the orders entered by him.
A branch manager can modify his own orders or orders of
any dealer under his branch.
A corporate manager can modify his own orders or orders
of all dealers and branch managers of the trading member
firm.

Order Management

Order cancellation :
Single Order Cancellation
Quick Order Cancellation
Order Cancellation for Disabled Member

Order Matching Rules

Order Matching Rules 1) The best buy order is
matched with the best sell order. An order may match
partially with another order resulting in multiple trades.
BID (BUY)
Qty.
1000
500
550

Price (Rs.)
50.25
50.10
50.05

ASK (Sell)
Price
Qty.
50.35
2000
50.40
1000
50.50
1500

Order Matching Rules

For order matching, the best buy order is the one with
the highest price and the best sell order is the one with
the lowest price.

Order matching rules

Buy side

11:00 am

Sell Side

Quantity Price
(Rs.)
1000
100
2000
99
2500
98
3000
97

Quantity Price
(Rs.)
2000
101
500
102
1500
103
2500
104

2800

3500

96

105

Best Buy Order Order with the Highest Price

Best Sell Order Order with the Lowest price

Order matching rules

Buy side

11:01 am

Quantity Price
(Rs.)
1000
100
2000
99
2500
98
3000
97
2800
96

Sell Side

Quantity Price
(Rs.)
2000
101
500
102
1500
103
2500
104
3500
105

- A new Buy order for 1000 shares @ Rs. 101.50 comes in

at 11:01 am. It is the active order.
- This Buy order will match immediately with the top sell
order

Order matching rules

Buy side

11:01 am

Sell Side

Quantity Price
(Rs.)
1000
100
2000
99
2500
98
3000
97
2800
96

Quantity Price
(Rs.)
1000
101
500
102
1500
103
2500
104
3500
105

Traded Quantity 1000. Traded Price Rs. 101. Traded Time :

11:01 am
Active Order matches with a Passive order and trade takes
place at the passive order price

Price Time Priority

Buy side

11:02 am

Sell Side

Quantity Price
(Rs.)
1000
100
2000
99
2500
98
3000
97
2800
96

Quantity Price
(Rs.)
1000
101
500
102
1500
103
2500
104
3500
105

A Buy order comes in at 11:02 am of 1000 Quantity @

Rs. 100.50
It will sit on top of the Buy order Book Price Priority

Price Time Priority

Buy side
Quantity Price
(Rs.)
1000
100.50
1000
100
2000
99
2500
98
3000
97

11:02 am

Sell Side

Quantity Price
(Rs.)
1000
101
500
102
1500
103
2500
104
3500
105

Price Time Priority

Buy side
Quantity Price
(Rs.)
1000
100.50
1000
100
2000
99
2500
98
3000
97

11:03 am

Sell Side

Quantity Price
(Rs.)
1000
101
500
102
1500
103
2500
104
3500
105

A Buy order comes in at 11:03 am of 1500 Quantity @ Rs.

100.75 (Order A). Another order comes in at 11:03:01 am of
1500 Quantity @ Rs. 100.75 (Order B)
Order A will sit on top of the Buy order Book Time Priority

Price Time Priority

Buy side

11:03 am

Sell Side

Quantity Price
Quantity Price
(Rs.)
(Rs.)
1500
100.75 (A)
1000
101
1500
100.75 (B)
500
102
1000
100.50
1500
103
1000
100
2500
104
2000
99
3500
105
Order A sits on top time priority

Block Trading Session

It is a 15 minute market; i.e. the trading window is open

from 9:00 hours to 9:15 hours.
For a block trade, order should be of a minimum quantity of
5,00,000 shares or minimum value of Rs. 5 crores
whichever is lower.
Orders get matched when both the price and the quantity
match for the buy and sell order.
Orders with the same price and quantity are matched on
time priority i.e. orders which have come ino the system
before will get matched first.
As per SEBI requirement, member is required to put orders
at a price not exceeding (+/-) 1% from the previous close
price/ruling market price, as applicable, of normal market.

Example
Trade Date

RAM
Buys 10 shares of
RIL @ Rs 1400
(Thru sharekhan)

SHYAM
Sells 10 shares of RIL
@ 1400
(Thru Indiainfoline)

T+0

1-Jul-10

T+1

Issues Cheque in
Transfer 10 RIL Shares
Favour of
from his DEMAT B.O
sharekhan Clearing A/C to Indiainfoline
Pool A/c
2-Jul-10 A/c# For 14000

T+2

3-Jul-10

Receives 10 RIL
shares in his
DEMAT B.0 A/c

Receives cheque
amount of 1400 from
Indiainfoline

RAMs Bank A/c

PAYIN OF FUNDS

Share khans Bank A/c

(Clearing)

NSCCL
(T+2)
India Infoline
Bank A/c (Clearing)

PAYOUT OF FUNDS
Shyams Bank A/c

PAYIN SHARES
Shyams Beneficiary A/c
Demat A/c

India Infoline Pool A/c

NSCCL
(T+2)
Sharekhan Pool A/c
``

PAYOUT SHARES

RAM Beneficiary A/c

Demat A/c

Derivatives

Derivative is a product whose value is

derived from the value of the underlying
asset.
Underlying asset can be Equity, Forex,
Commodity, or any other asset.

Derivatives

Financial
Commodity
Derivatives Derivatives
Equity
Derivatives

Index

Stocks

Real
Estate

Foreign
Exchange

Debt
Derivatives

Interest
Rate

GOI Sec
Bonds
T-Bills

Types of Derivatives Traded In

India
Forwards
Futures
Options
Swaps

Forwards
A forward contract is a particularly simple
derivative.
It is an agreement to buy or sell an asset
at a certain future time for a certain price.
The contract is usually between two
financial institutions or between a
financial institution and one of its
corporate clients.
It is not traded on the exchange

Example for Derivative

Contract
A farmer fears that the price of wheat (underlying), when

his crop is ready for delivery will be lower than his cost of
production.
Let's say the cost of production is Rs 8,000 per ton. In order
to overcome this uncertainty in the selling price of his crop,
he enters into a contract (derivative) with a merchant, who
agrees to buy the crop at a certain price (exercise price),
when the crop is ready in three months time (expiry period).
In this case, say the merchant agrees to buy the crop at Rs
9,000 per ton..
If the selling price of soybean goes down to Rs 7,000 per
ton, the derivative contract will be more valuable for the
farmer, and if the price of soybean goes down to Rs 6,000,
the contract becomes even more valuable.
This is because the farmer can sell the soybean he has
produced at Rs .9000 per tonne even though the market
price is much less. Thus, the value of the derivative is
dependent on the value of the underlying

Increase price &

low supply

Decrease in wheat price

Higher Production

Forward
Contract

Contract
Specification
Quantity

10,000 Kgs

Price

15 Rs per Kg

Settlement 30-Dec
date
Place
Quality

Punjab
A Grade

If wheat
price increase
to 25 do you
think farmer
will honor this
contract ?

Comparison b/w Forwards &

Futures
Forward
Over the Counter

Futures

Customized Contract

Traded in Organized
Exchange
Standardized Contract

Low Liquidity

High Liquidity

No Margin Payment

Margin Payment

Settlement on the last

day

Daily Settlement

Future Contract
Futures are derivative contracts to buy or sell a specified
quantity or underlying assets at an agreed price, on or before a
specified time. They are standardized forward contracts, which
are traded on the exchanges mainly BSE & NSE. Since they are
traded on the exchange on electronic platform, it provides
them transparency, liquidity, and also eliminates the counter
party risk due to guarantee provided by the exchange.

Long Position = Buy

Short Position = sell
On expiry date (i:e last Thursday) of the month all open position
as to be compulsorly closed (squared off)

Futures Terminology

Spot price :- Price at which an asset trades in the spot

market
Future price :- Price at which the future contract trades in the
futures market.
Contract cycle :- Period over which a contract trades.
Expiry date :- It is the date specified in the futures contracts.
This is the last day on which the contract will be traded, at the
end of which it will cease to exit.
Contract size :- The amount of asset that has to be delivered
under one contract.
Basis :- Basis means future price minus spot price.
Cost of carry :- The relationship between future price and spot
price.
Initial margin :-The amount that must be deposit in the margin
account at the time a future contract is first entered into is
known is initial margin.

Futures Terminology

Marking to market :- At the end of each day, the margin

account is adjusted to the investors gain or loss depending
upon the futures closing price.
Maintaining margin :- If the balance in the margin account
falls below the maintenance margin, the investor receives a
margin call and is expected to top up the margin account to
the initial margin level before trading commences on the
next day.


NIFTY
ACC
ARVIND
ASHOKLEY
CIPLA
COALINDIA
COLPAL
HDFCBANK
ICICIBANK
LT
M&M
M&MFIN
MARUTI
NHPC
RELIANCE
RELINFRA
TATASTEEL
TCS
Unitech
ZEEl

Lot Size
25
250
1000
8000
500
1000
125
250
1250
250
250
1000
125
10000
250
500
500
125
9000
1000

Settlement/ Closing
Price
8635.85
1572.2
286.75
70.95
711.6
365.75
2040.25
1056
330.3
1685.2
1207.75
265.75
3669.15
19.8
858.05
454.55
337.45
2596.45
19.4
360.85

Per Contract
21810
61738
48008
101500
55955
57508
40042
41583
64894
66218
47427
41748
72131
32000
33728
44559
26536
50984
51388
56763

%
10%
16%
17%
18%
16%
16%
16%
16%
16%
16%
16%
16%
16%
16%
16%
20%
16%
16%
29%
16%

Do Find Difference in Price b/w Spot &

Futures .guess why

Pricing Futures
Pricing of futures is based on cost-of-carry method. Every time
the observed price deviates from the fair value, arbitragers
would enter into trades to capture the arbitrage profit.
Pricing Futures = Spot +Cost of carry dividend (if any)
Therefore Cost of carry method :-

F = S* (1+r)

S = spot Price
r = Cost of finance
T = Time till expiration in years

Example:Security XYZ ltd trades in the spot market

at Rs. 100. Money can be invested at 12%
p.a.The fair value of a one month futures
contract on XYZ will be 100.99 according
to cost of carry method.
Future Price = (100*1.12)^(*30/365)
= 100.93

Solution

Sell 2 lots of Nov 2014 HDFC Futures at 855

On Nov 2014

HDFC BANK @ 890

Profit on Underlying
shares
240*500=120000
( Rs 890-650)
Loss on futures Rs
-35*500= 17500
(Rs 855-890)
Total Profit 102500

HDFC BANK @ 750

Profit on Underlying

shares 100*500=50000
( Rs 750-650)
Profit on futures Rs
105*500= 52500
(Rs 855-750)
Total Profit
102500

What is Options
Options are derivative contracts
where the Buyer (Holder) gets a right
(but not obligation) to buy or sell a
specified quantity of the underlying
asset at an agreed price (strike price)
on or before the specified future date
(expiration date) based on the option
type

Options
RiskSeller
limited
UNLIMTED(Max
to premium
) paid
Option
(Writer)

Types of Options
Buying
Bearish
-Bullish view
View
TypesFor
of Selling
Options

Illustration -Options

Foodworld offers Membership card for fee of Rs 1000

Membership fee is not refundable
Which entitles ( Right) the holder to buy 1000 kg onions at
30 per Kg
Membership card is valid for 30 days
Membership card can be sold / transferred to another party
by holder

will you buy onions from Food world if onions marke

So Options

Gives the buyer the right

Not the obligation
To buy or sell
A specified underlying
At a set price
On or before a specified date

Option Terminology

Option Premium

Price paid by the buyer to acquire the

right

Strike Price or Exercise Price

Price at which the underlying may be

purchased

Expiration Date

Last date for exercising the option

Exercise Date

Date on which the option is actually

exercised

Types of Options based on Settlement

American Option (options on
stocks)
can be exercised any time on or before the
expiration date

European Option (options on index)

can be exercised only on the expiration date
(options on index)

Call Option
A call option gives the buyer, the right to
buy specified
quantity of the underlying asset at the set
strike price on
or before expiration date.
The seller (writer) however, has the
obligation to sell the underlying asset if the
buyer of the call option decides to exercise
his option to buy.

Payoff for Buyer of Call

option
Profit

30
0

Onion

1
Premium
paid
Loss

Payoff for Seller of call

option
Profit
Premium
Received
60
0

Loss

6000
Nifty

Put Option
A buyer of Put option has the right
but not the obligation to sell the
underlying at the set price by paying
the premium upfront.
He can exercise his option on or
before expiry.

Payoff for Buyer of Put

Option
Profit

6000

Nifty

60
Premium
paid
Loss