Exchange Trading in India: An Overview

After years of experience into Securities Post Trade Processing and OTC Derivatives Regulatory Reporting in international markets, I have started learning about the Indian market, especially the back office functions and related applications used by a Stock Broker. However, before diving deep on the back office functions, there is still some high level understanding required on the market as a whole and the front to back setup.

Here is an overview of the market.

Key Players

Brokers

There are 2 types of brokers here full service brokers and discount brokers. Full Service Brokers not only help you execute orders through various online and offline methods, they also have a research desk who provide you investment advice and you may also be allocated a relationship manager. The full service brokers charge a percentage of the value of the executed order. They usually operate with more number of branches than the discount brokers. Few of the full service brokers are Angel Broking, Sharekhan, ICICI Direct, HDFC Securities, Karvy, Religare, etc

The full service brokers also have sub-brokers who deal through them.

Discount brokers on the other hand levy a cheaper commission and the commission is usually a fixed amount per order. Discount brokers have emerged due to the increasing usage online trading platforms. Few of the discount brokers are 5Paisa.com, Zerodha, UpStox, etc

The brokers are the Trading Members on the exchanges. Sub-brokers are not trading members and deal through the brokers.

Exchanges

Below are the main stock exchanges in India.

• Bombay Stock Exchange (BSE)
• National Stock Exchange (NSE)
• Multi Commodity Exchange (MCX)
• National Commodity & Derivatives Exchange (NCDEX)
• Metropolitan Stock Exchange of India (MSEI)
• India Commodity Exchange (ICEX)

Clearing Houses/Central Counterparties

Below are the clearing houses in India (for exchanges mentioned above in that order). - Indian Clearing Corporation Ltd (ICCL) (earlier it was BOI Shareholding Ltd aka BOISL) - National Securities Clearing Corporation Ltd (NSCCL) - Clearing Corporation of Inda Ltd (CCIL) for Government Bonds (and other OTC/off-exchange trades). - MCX SX Clearing Corporation Ltd (MCX-SXCCL) - National Commodity Clearing Ltd (NCCL) - Metropolitan Clearing Corporation of India Ltd (MCCIL) - ICEX has in house Clearing Department and no separate Clearing Corporation yet.

While trades in most of the segements are cleared and settlement is guaranteed by the Clearing Houses, there are few exceptions to this. For eg, NSCCL does not clear the trades in the Trade-for-Trade sub-segment.

Clearing Members

Clearing members are the members of the Clearing Houses/CCPs. They facilitate the settlement of the deals executed by the Trading Members. In some cases, the Clearing Member is also a Trading Member and clears/settles proprietary and agency deals they deal with and also of other Trading Members.

The clearing members receive the pay-in and/or pay-out obligations for funds and securities seperately.

In case of Custodians, they have to accept the settlement obligation for their clients, failing which, the obligation will be assigned to the trading member.

Depositories

There are 2 depositories in India. - National Securities Depository Ltd (NSDL) - Central Depository Services Ltd (CDSL)

Clearing Banks

There are 10 to 20 Clearing Banks through which funds are settled. The list of banks for each Clearing House varies (Axis, BOI, HDFC, ICICI, IDBI, etc). The clearing members are required to maintain accounts with any of these banks for settlement of funds.

Depository Participants

A Depository Participant can be a bank, financial institution, broker or any entity eligible as per SEBI norms. Investors open demat accounts at the Depositories through the DPs. As of 2012, there were close to 300 DPs for NSDL and 600 DPs for CDSL. DPs submit the Pay-In/Pay-Out instructions on the behalf of the beneficiaries or for their own properietary accounts.

They are also responsible for updating beneficiary details (in case of any change) before the execution date of Corporate Actions.

Custodians

Custodians are clearing members and DPs and not trading members. They settle trades on behalf of their clients. There are about 15 custodians in India. FIIs must appoint a domestic custodian before trading in India market.

Investors

I kept this set of players right at the end but they make or break the market :) Investors broadly fall into 2 categories Retail Investors and Institutional Investors.

Listed Companies

When there are no companies willing to list themselves, there is no market in the equity and fixed income asset classes :)

There are several listed companies across segments.

Asset Classes

Following are the asset classes supported in the market across exchanges. Each exchange has its own sub-set of asset classes supported. - Equities - Fixed Income - Commodities - Commodities Futures - Equity Derivatives (Futures & Options) - Currency Derivatives - Interest Rate Futures

Order Placement

Order entry can be done through a number of methods online trading account (web/mobile app), in-house desktop applications at broker office, front end provided by exchanges (NEAT, BOLT, etc), trading algorithms, calling a representative in brokers office, etc

Faster access

Direct market access (for instituional investors only), co-location and proximity hosting are available for faster access to the network, reducing network latency.

Order routing

Orders can be routed to a specific exchange or to Smart Order Routing (SOR) engine to systemically route to an exchange based on various factors like price, cost, probability of execution, etc

Type of Orders

There are various types of orders supported in the India Market.

Market Order

This type of order executes the order at best available price. Lowest price is matched for Buy orders and highest price opposite order is matched for Sell orders. This is an order type for fastest order execution.

Limit Order

In this type of order, Buyer/Seller put limit price and order is not executed until a match is found matching the given criteria. This type of order is used when the markets are volatile.

Market Protection Order

In this type of order, Buyer/Seller give a %age deviation from current price. Orders are executed if there is a match found within that deviation.

Day Order

In this type of Order, there is a fixed price provided.

Stop Order

Stop orders are conditional limit orders. Order is activated when last traded price (LTP) is greater (for buys) or lesser (for sells) compared to the Stop Loss Trigger Price (SLTP). The order becomes a limit order when the condition is met.

Fill/Kill Order

Fill/Kill orders are executed or cancelled immediately.

Block/Bulk Deals

Block/Bulk deals are large quantity/value (in case of Block Deal criteria is that Stock quantity > 500K or Value > Rs. 5 Crores and in case of Bulk Deals, it is when the deal quantityew is more than 0.5% of total company shares). The type of clients who can place these orders depends on the exchange, they are usually Institutional Investors or HNIs. There is a separate trading window provided by the exchanges for these deals. Block deals information is provided to general public on the same day.

Margin

There are 3 types of margins in the Equity segment.

• Value at Risk (VaR)
• Extreme Loss
• Mark-to-market

There are 5 types of margins in the Derivatives (F&O) segment across exchanges, what applies to each exchange varies. - Initial Margin - Exposure Margin - Mark-to-market Margin - Premium Margin - Assignment Margin

There are 3 types of margins for Currency Derivatives segment. - Initial Margin - Calendar Spread Margin - Extreme Loss Margin

Settlement

The clearing houses gurantee the settlement for trades on the exchanges. Each clearing house has its own dedicated exchange or a set of asset classes across exchanges that it guarantees. Actual settlement of securities and funds happens as per the settlement cycle for the respective exchange/asset class.

Clearing members release the pay-in / pay-out instructions to the depositories. CMs have an option of early pay-in of securities. Also they can opt for direct delivery to beneficiary accounts where the Clearing House generates instructions for pay-out to beneficiary accounts instead of the CMs pool account.

Settlements for ETDs includes MTM settlement on a day to day basis and final settlement on expiry (for futures), premium settlement on a daily basis and exercise settlement (for options). ETDs can be physically settled or cash settled.

Stock Lending/Borrowing

SLB is supported in India by both ICCL and NSCCL. SLBs can be utilised by both Retail and Institutional investors to cover short sells or for any other purpose. These are lending fee based trades. One noteable difference is that these will be settled in Gross and wont be netted.

Corporate Actions

Both stock and/or cash corporate actions are supported. These are Dividends, Stock Splits, Bonus Issue, Rights, Mergers, etc. Depositories inform DPs about the record date as announced (on the announcement date) by the Issuers / R & T Agents. Issuers / R&T agents perform the actual action on the Execution Date.

There are processes around scenarios of CAs being executed during transfer of securities (commonly known as Claims).

Other points

There is specific terminology in the market. - Confirmations are called Contract Notes. - Listed stocks are called Scrips. - Trading book holding purchase/sale transactions is called Sauda Book - There are no Swift Settlements required to be sent between participants. The settlement instructions are called Pay-In/Pay-Out instructions. - Orders executed on exchange do not require broker to broker confirms, confirms matching, settlement matching, etc.

References

https://www.nseindia.com/ http://www.bseindia.com/ http://www.icclindia.com/ https://www.nscclindia.com/ https://www.mcxindia.com/ https://www.ncdex.com/ https://www.ccilindia.com/ https://www.msei.in http://www.icexindia.com/ https://www.cdslindia.com/ https://nsdl.co.in

Note: This article has been written based on the authors own understanding of the market.

About the author

Vishnu Vardhan Chikoti is a co-author for the book "Hands-on Site Reliability Engineering". He is a technology leader with diverse experience in the areas of Application and Database design and development, Micro-services & Micro-frontends, DevOps, Site Reliability Engineering and Machine Learning.