Trading Mechanism — Screen-Based Trading and Settlement

Buying and selling on an Indian stock exchange today is entirely electronic, a system generally called screen-based (online) trading, which replaced the older 'open outcry' floor system where brokers physically shouted and signalled orders to each other.

Step 1 — Selecting a broker and opening accounts. An investor who wishes to trade must first register with a SEBI-registered stockbroker (trading member). This requires opening a trading account with the broker (to place buy/sell orders), a demat (dematerialised) account with a depository participant (to hold securities in electronic form — detailed in the earlier Depository System chapter), and a linked bank account (to settle the cash side of every trade).

Step 2 — Placing the order. The investor places a buy or sell order with the broker, specifying the security, quantity and price (or a 'market' order to transact at the best available price). The broker keys this order into the exchange's electronic trading system through a computer terminal.

Step 3 — Order matching. The exchange's trading system automatically matches buy and sell orders on the basis of price-time priority — the best price gets matched first, and among identical prices, the order placed earliest is matched first. This matching happens continuously and automatically, without any human intervention deciding who trades with whom, which keeps the process fast, fair and transparent.

Step 4 — Trade confirmation. Once matched, a contract note is generated and sent to both the buying and selling investors through their respective brokers, confirming the price, quantity and brokerage/charges for the trade.

Step 5 — Clearing and settlement. The trade is then passed to the exchange's Clearing Corporation, which becomes the counterparty to both the buyer and the seller (a mechanism called novation), guaranteeing that the trade will be honoured even if the original buyer or seller defaults. Actual settlement — transferring the shares from the seller's demat account to the buyer's, and the money from the buyer's bank account to the seller's — is completed under rolling settlement.

<!-- FIGURE-NEEDED: simple left-to-right flow diagram of the trading and settlement cycle: Investor -> Broker (trading account) -> Stock Exchange electronic order-matching system -> Clearing Corporation (novation/guarantee) -> Depository (demat transfer) + Bank (funds transfer), labelled 'T+1 settlement'. --> …