1

FINANCIAL MARKETS

SUBMITTED BY

RAMAN KUMAR (15715)

BFIA -3
 2

BSE TRADING SYSTEM

BACKGROUND
Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning three
centuries in its 133 years of existence. What is now popularly known as BSE was established as "The
Native Share & Stock Brokers' Association" in 1875.

BSE is the first stock exchange in the country which obtained permanent recognition (in 1956) from the
Government of India under the Securities Contracts (Regulation) Act 1956. BSE's pivotal and pre-
eminent role in the development of the Indian capital market is widely recognized. It migrated from the
open outcry system to an online screen-based order driven trading system in 1995. Earlier an
Association Of Persons (AOP), BSE is now a corporatized and demutualised entity incorporated under
the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatization and Demutualization)
Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI). With demutualization,
BSE has two of world's best exchanges, Deutsche Börse and Singapore Exchange, as its strategic
partners.

Today, BSE is the world's number 1 exchange in terms of the number of listed companies and the
world's 5th in transaction numbers. The market capitalization as on December 31, 2007 stood at USD
1.79 trillion. An investor can choose from more than 4,700 listed companies, which for easy reference,
are classified into A, B, S, T and Z groups.

BSE provides an efficient and transparent market for trading in equity, debt instruments and
derivatives. It has a nation-wide reach with a presence in more than 359 cities and towns of India. BSE
has always been at par with the international standards. The systems and processes are designed to
safeguard market integrity and enhance transparency in operations. BSE is the first exchange in India
and the second in the world to obtain an ISO 9001:2000 certification. It is also the first exchange in the
country and second in the world to receive Information Security Management System Standard BS
7799-2-2002 certification for its BSE On-line Trading System (BOLT).

BSE also has a wide range of services to empower investors and facilitate smooth transactions

Investor Services: The Department of Investor Services redresses grievances of investors. BSE
was the first exchange in the country to provide an amount of Rs.1 million towards the investor
protection fund; it is an amount higher than that of any exchange in the country. BSE launched
a nationwide investor awareness programme- 'Safe Investing in the Stock Market' under which
264 programmes were held in more than 200 cities.
The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line screen based
trading in securities. BOLT is currently operating in 25,000 Trader Workstations located across
over 359 cities in India.
 3

BSEWEBX.com: In February 2001, BSE introduced the world's first centralized exchange-based
Internet trading system, BSEWEBX.com. This initiative enables investors anywhere in the world
to trade on the BSE platform.
Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real-time basis the
price movements, volume positions and members' positions and real-time measurement of
default risk, market reconstruction and generation of cross market alerts.

BSE TRADING SYSTEM

The, Mumbai Exchange has initiated a number of measures aimed at providing quality products and
services and expanding its network using cutting edge information technology. The BSE made its
transition from an 'outcry' system of trading to a completely electronic trading system.

BSE has introduced electronic trading system known as BOLT (BSE on Line Trading) with the following
facility

1. Trading system displays on a continuous basis scrip and market-related information required
supporting traders. (Information includes best five bids and offers, last traded quantity and
price, total buy and sell depth (irrespective of rates), open, high, low and close price, total
number of trades, volume and value, and index movement. Other company-related
information is also displayed)
2. As soon as an order is matched, the confirmation of the trade is generated on-line.
3. The order matching logic is based on best price and time priority.
4. The BSE On line Trading Platform has a capacity of conducting 2 million trades per day.
5. The latest state of the art technology infrastructure with Trader Work Stations located in more
than 400 cities all over the country.
6. Trading on the BOLT system is conducted from Monday to Friday between 9: 30 a.m. and 3:30
p.m.
7. Trading can also be conducted through the BSE Internet Trading System - www.bsewebx.com
the first Exchange enabled Internet Trading System.
8. BSE aims to provide trading anywhere and at anytime. With this endeavor in mind, the
exchange continuously upgrades the hardware, software and networking systems so as to
enable it to enhance the quality and standards of service to its members and other market
intermediaries.
 4

PRICE DISCOVERY MECHANISMS

During the pre-opening period (9.15a.m.-9.30a.m.), brokers input the bids and offers they receive from
investors into the system until they match. The mechanism for which the price of equities is determined
is as follows:

1. The best price (price priority): The transaction is executed for the best price.
2. Type of order: If an order is conditional, precedence of execution is given to orders that are un-
conditional. For example, if there are two orders with the same price, the system will give
precedence to the un-conditional order.
3. Source of order: The sources of order are given precedence of execution as follows:

Priority 1 => client’s order, foreign investor’s order, market control’s order
Priority 2 => mutual fund’s order, the issuing company’s order, specialist’s order
Priority 3 => insider’s order
4. Time of order priority: In case the price and type are the same, precedence is given to the
orders entered into the system first.
5. Cross priority: Cross priority is implemented if the one with the priority is on the active side.
Trading in cross priority takes precedence over other house, then against the same house order.
6. Random factor priority: In case two orders are received in the same time, precedence is given to
the random factor.

CLEARING AND SETTLEMENT

The settlement of transactions was earlier done in the weekly settlement environment, where the
exchange had a carry forward facility. The exchange commenced exchange of trades on rolling basis
where the trades are settled on T+ 2 basis.

Undelivered quantities of securities in settlement is promptly auctioned or closed out as per the well-
laid procedure.

Two depositories, namely the Central Depository Services (India) Ltd. and National Securities
Depository of India Ltd. operate in the Indian Market place. The Clearing House of the exchange has
well- structured linkages with both the depositories. Direct transfer of securities to and from the
Beneficial Owner Accounts is facilitated at the Clearinghouse level only, making for the seamless
movement of securities in the settlement system.

The settlement of transactions in the depositories mode is based on the ISIN codes of the securities.
The exchange Rules, Bylaws and regulations have clearly laid down the default handling procedure.