Commerce · Ch 7 — Stock Exchange
Trading Procedure and Dematerialisation
Trading Procedure and Dematerialisation
Trading in securities today looks very different from the paper-share, open-outcry trading floor of even a few decades ago. The modern trading procedure rests on two foundations — the depository system and electronic, order-matched trading — before ending in settlement.
Dematerialisation and the depository system. Under the Depositories Act, 1996, share certificates that were once printed on paper are now overwhelmingly held in electronic (dematerialised/"demat") form. A depository is an institution that holds securities of investors in electronic form and enables their transfer through simple book entries, rather than the physical movement of paper certificates (with all the risks of loss, theft, forgery and delay that physical transfer carried). An investor accesses the depository system through a Depository Participant (DP) — an agent of the depository, typically a bank or a broking firm — with whom the investor opens a demat account, exactly as one opens a bank account to hold money. Once shares are dematerialised, buying and selling them on the exchange becomes simply a matter of debiting and crediting demat accounts.
The path of a trade order runs as follows:
| Step | Action |
|---|---|
| 1 | Investor places an order with a broker |
| 2 | Broker routes the order to the stock exchange's electronic trading system |
| 3 | The exchange matches the order with a counter-order |
| 4 | The clearing corporation/depository settles the trade by transferring securities and funds |
Placing an order and trade execution. An investor who wishes to buy or sell securities places an order with a registered stock broker (a member of the exchange), specifying the security, the quantity, and the price (or instructing the broker to trade at the best available market price). The broker keys this order into the exchange's electronic trading system, where it is automatically matched against a corresponding buy or sell order from another investor at the exchange's own screen-based order-matching system, and the trade is executed.
Settlement. Once a trade is executed, it must be settled — the buyer must actually receive the securities (credited to the demat account) and the seller must actually receive the sale proceeds. Indian stock exchanges follow a rolling settlement cycle in which trades are settled within a fixed, short number of working days of execution, through the exchange's clearing corporation, which guarantees the settlement of every trade so that neither party is left exposed to the other's default. …