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Business Studies and Management · Ch 8 — Financial Markets

Trading and Settlement Procedure

8.4.2

Trading and Settlement Procedure

Trading in securities is now executed through an on-line, screen-based electronic trading system — all buying and selling of shares and debentures is done through a computer terminal. In the earlier open outcry system, securities were bought and sold on the floor of the exchange by shouting out prices; today almost all exchanges have gone electronic, and trading is done in the broker's office through a computer terminal connected to the exchange's main computer system. Shares can be held either in physical form or, more commonly now, in an electronic book-entry form called the dematerialised (demat) form.

Screen-based trading has several advantages:

  1. It ensures transparency, as participants can see the prices of all securities while business is being transacted.
  2. It increases the efficiency of information, helping in fixing prices efficiently.
  3. It increases the efficiency of operations by reducing time, cost and the risk of error.
  4. It allows people from anywhere in the country and abroad to buy or sell through brokers without knowing each other, improving the liquidity of the market.
  5. It provides a single trading platform, as business is transacted at the same time across all trading centres.

Steps in screen-based trading

The following steps are involved in buying and selling securities:

  1. The investor approaches a registered broker or sub-broker and enters into an agreement, signing a broker-client agreement and a client registration form and providing details such as the PAN number (mandatory), date of birth and address, bank account and depository account details. The broker then opens a trading account in the investor's name.
  2. The investor opens a demat account (beneficial owner or BO account) with a depository participant to hold and transfer securities in demat form, and a bank account for cash transactions.
  3. The investor places an order with the broker, giving clear instructions about the number of shares and the price; the broker issues an order confirmation slip.
  4. The broker goes on-line, connects to the exchange and matches the share and best available price.
  5. When the order is executed electronically, the broker issues a trade confirmation slip.
  6. Within 24 hours of the trade, the broker issues a Contract Note containing the number of shares, the price, the date and time of the deal, the brokerage charges and a unique order code. This is a legally enforceable document that helps settle disputes between the investor and the broker. …