National Stock Exchange of India

NSE, or the National Stock Exchange of India Limited, is India’s leading stock exchange. Established in 1992 and located in Mumbai, this exchange brought a paradigm shift to the Indian financial market right after it had suffered a setback due to an unprecedented scam that hit the Bombay Stock Exchange. This article, divided into 4 major sections highlighted below, will introduce you to the legacy of NSE.

History of National Stock Exchange of India

After the outbreak of 1992 security scam in which a BSE member, Harshad Mehta, was exposed manipulating the market, the government of India decided to promote establishing NSE based on recommendations made by High Powered Study Group on Establishment of New Stock Exchanges. The immediate aim was to provide equal access to investors from all across the nation and make participating in stock market easier.

In November 1992, NSE was established as a tax-paying company with key investors including Life Insurance Corporation of India, State Bank of India, IFCI Limited, IDFC Limited and Stock Holding Corporation of India Limited. It was recognized as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993 and commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. Operations in the equity segment were started in November 1994 followed by Derivatives segment in June 2000.

NSE was the first stock exchange in India where ownership, management and trading were handled by three independent set of people. While the ownership is with various financial institutions and banks, the management is handled by independent professionals who are forbidden from directly or indirectly trading on the exchange. This demutualization has eliminated the kind of conflict of interest that was at the root of 1992 security scam.

Functions of NSE

The NSE was set-up with an express objective to fulfil the following functions:

  • establishing a nation-wide trading facility for equities, debt and other hybrid instruments
  • ensuring equal access to investors across the nation through an appropriate communication network
  • providing a fair, efficient and transparent securities market to investors using electronic trading systems
  • enabling shorter settlement cycles and book entry settlements systems, and
  • meeting the current international standards of securities markets

NSE successfully fulfilled these functions by establishing the first electronic stock market of the nation. NSE was instrumental in creating National Securities Depository Limited (NSDL), the first depository in India, allowing investors to hold and trade securities electronically. This not only made investing simple, but also provided increased transparency. The price information that was earlier available only to a handful of traders present at the exchange, was now widely broadcasted and available to everyone at their own remote location.

Before the system introduced by NSE, an investor who wanted to trade a security not listed on the nearest exchange had to route orders through a series of correspondent brokers to the appropriate exchange. This resulted in increased uncertainty and high transaction costs. NSE made it possible for an investor to access the same market and order book, irrespective of location and at the same cost as every other investor. NSE trading terminals are now present in 363 cities and towns across India and can be accessed through brokers from anywhere on the globe.

Features of National Stock Exchange

NSE, like every other leading stock exchange today, runs an order-driven market as opposed to quote-driven market. The fully automated screen based trading system that it runs is called National Exchange for Automated Trading (NEAT).

The order management system under NEAT gives a unique number to each order received and if a match is not found immediately, it is added to an order book where the sequence of orders to be matched are determined based on price-time priority. That is, if two orders are entered into the system, the order having the best price gets the higher priority and within the orders of the same price priority is given to the older order.

Order matching is done by comparing the best buy order, the buy order with the highest price, with the best sell order, the sell order with the lowest price. This is because a seller would like to sell to the buyer offering the highest price and vice versa. While orders can be partially matched till the complete order can be completed, the matches are always made based on the passive price of the order and not the active price at which the match is made.

NEAT also allows members to specify conditional clauses on the submitted orders These clauses can be of the following kinds:

 

  • Time related condition
  • Price related condition
  • Quantity related condition

 

Time related conditions include

  1. Day order – the order is valid only for the day on which it is entered. If the order is not matched during the day, it will get cancelled at the end of the trading day.
  2. Good Till Cancelled (GTC) order -the order remains in the system until it is cancelled by the member. It will therefore span multiple trading days if it does not get matched. The maximum number of days a GTC order can remain in the system is notified by NSE from time to time.
  3. Good Till Date (GTD) order – the order stays in the system till the date mention3ed by the member. The maximum number of days a GTD order can remain in the system is notified by NSE from time to time.
  4. Immediate or Cancel (IOC) order – if the order is not executed on release, it will be removed from the market. If a partial match happens, the unmatched portion of the order is cancelled immediately.

Price related conditions include:

  1. Limit Price/Order – the expected price is mentioned by the member while entering the order into the system.
  2. Market Price/Order – the expected price is set as the best price available at the time the order was placed.
  3. Stop Loss (SL) Price/Order – an order which gets activated only when the market price of the relevant security crosses a threshold price.

Quantity related conditions include:

  1. Disclosed Quantity (DQ) order– an order in which only a part of the order quantity is disclosed to the market. For example, an order of 10000 units with a disclosed quantity condition of 2000 units will mean that 2000 units are displayed to the market at a time. After this is traded, another 2000 units will be released till the full order is executed. NSE may set a minimum disclosed quantity criteria from time to time.
  2. Minimum Fill (MF) order – an order in which the partial match should be of at least the specified quantity. For example, an order of 1000 units with minimum fill 200 will require that each trade be for at least 200 units.
  3. All or None (AON) order – an order which cannot be partially matched.

While NSE supports MF and AON orders, these are disabled at the present as per SEBI directives.

NSE employs a rolling settlement mechanism where each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations for the day. NSE settles the trades on T+2 basis, that is a trade is settles on the 2nd working day after it has been executed.

Segments

NSE provides trading across following sectors:

  • Equities
    • Equities
    • Indices
    • Mutual Funds
    • Exchange Traded Funds
    • Initial Public Offerings
    • Security Lending and Borrowing Scheme
  • Derivatives
    • Equity Derivatives
    • Currency Derivatives
    • Interest Rate Futures
  • Debt
    • Corporate Bonds

Trading schedule

The market timings of the equities segment are:

(1) Pre-open session

  • Order entry & modification Open: 09:00 hrs
  • Order entry & modification Close: 09:08 hrs

(2) Regular trading session

  • Normal/Retail Debt/Limited Physical Market Open: 09:15 hrs
  • Normal/Retail Debt/Limited Physical Market Close: 15:30 hrs.

Equity trading takes place on all days of the week, except for Saturdays, Sundays and other holidays declared by NSE in advance.

With a total market capitalization of more than US$1.41 trillion, NSE is the world’s 12th-largest stock exchange today and the fourth largest by equity trading volume in 2015, according to World Federation of Exchange. In 1994, NSE was equipped to handle 2 orders a second. This increased to 60 orders a second by 2001. Today NSE can handle 1,60,000 orders per second. The settlement cycle has been reduced from T+3 to T+2.

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