chapter 2 investors general awarness about...

“A Study on Investors General and Legal Awareness For Online Trading in Gujarat State.”

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CHAPTER – 2

INVESTORS GENERAL AWARNESS ABOUT

ONLINE TRADING

2.1 INTRODUCTION:

The rapidly advancing technology, particularly the Internet, has drastically changed the

social and economic landscapes and every aspect of our daily lives. In the securities

industry, the Internet has facilitated on-line trading, changing the way the market works,

as well as the way the investors access the market. Having taken advantage of

information technology at an opportune time, India has emerged as a front-running

country of on-line trading in the global securities markets.

Online trading India is the internet based investment activity that involves no direct

involvement of the broker. There are many leading online trading portals in India along

with the online trading platforms of the biggest stock houses like the National stock

exchange and the Bombay stock exchange. The total portion of online share trading India

has been found to have grown from just 3 per cent of the total turnover in 2003-2004 to

32 per cent in 2007-2008.

With the rapidly increasing role of the Internet in our daily lives on both, the personal and

the professional levels, the introduction of the Online Trading concept to the Financial

Markets deemed necessary. Online trading is defined as, “buying and selling of financial

products or securities online using the Internet.” Stock Exchanges offering such a service

should have an advanced trading system to be able to absorb and handle online orders

and their execution efficiently.

Investors interested in online trading should access the market through a licensed online

broker by either:


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Sending an electronic order directly to the broker, who will then place this order on

the market; or

Placing the order directly on the market through the connection provided by the

online broker and under the broker‟s account.

It is worth mentioning that in some markets, where more than one stock exchange exists,

online trading does not allow the investor to directly place his orders on the market but he

is obliged to send the orders over the Internet to his online broker, who in turn decides

which market to send this order to for execution.

2.2 CONCEPT OF ONLINE TRADING:

Online trading has become very popular in the last couple of years because of the

convenience of ease and use. Numerous companies have gone online to meet their

customers‟ demands, enabling them to trade when they want and how they want to.

Trading has existed for as long as we can remember and when we talk about it, we are

refereeing to trade as in financial dealings.

Trading is the buying and selling of goods and services, but in the current context, it is

the buying and selling of financial services, including securities, through the World Wide

Web.

According to Dixcart Online (one of the online brokerage firms), “Internet trading will

rapidly become the „normal‟ way to purchase many goods and services in the future…”

“On-line trading” is broadly defined as a trading mechanism where investors place

orders and confirm trading results via electronic communication channels, such as the

Internet, mobile phones, and Personal Digital Assistants (PDA). In Korea, the whole

process of securities transactions, from order placement and routing, order execution, to

trade confirmation, is fully automated, thus enabling the investors who have placed

orders to confirm their trading results within a few seconds.


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2.3 HISTORY OF ONLINE TRADING:

The history of e-trading began in 1983, when a doctor in Michigan placed the first online

trade using E-TRADE technology. What began with a single click over 16 years ago has

now taken the world by storm.

The concept was visualized by one Bill Porter, a physicist and inventor with more than a

dozen patents to his credit, who provided online quotes and trading services to Fidelity,

Charles Schwab, and Quick and Reilly. This led Bill to wonder why, as an individual

investor, he had to pay a broker hundreds of dollars for stock transactions. With

incredible foresight, he saw the solution at hand: Someday, everyone would own

computers and invest through them with unprecedented efficiency and control.

One of the earliest trading sites on the internet with exception to e-Bay which accepts

cash transactions for all goods was Game Trading Zone. The domain name ugtz.com was

implemented in an independent database in the spring 1999. This was a departure from

simply listing items on a forum or text document. The database helped traders by

showing them a list of potential trading matches, and showed historical transactions as

well.

2.4 FEATURES OF ONLINE TRADING:

Online trading has basically replaced a phone call with the Internet. Instead of interacting

with brokers over the phone, the consumer is clicking the mouse; not to mention that

other options are still available, but at a cost. Online trading has given,

Customers real-time access to account information,

Stock quotes,

Elaborate market research

Interactive trading.

Further, online trading has led to additional features such as:

http://en.wikipedia.org/wiki/Ebay

http://en.wikipedia.org/wiki/GameTZ.com

http://en.wikipedia.org/wiki/Domain_name

http://en.wikipedia.org/wiki/Database


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Limit/Stop orders:

Orders that can go unfilled, but there is an extra charge for this lewaway facility

since one need to hold a price.

Market orders:

Orders can be filled at unexpected prices, but this type is much more risky, since

you have to buy stock at the given price.

Cash account:

Funds have to be available prior to placing the order.

Margin account:

Orders can be placed against stocks, to increase purchasing power.

2.5 FACILITIES OF THE ONLINE TRADING IN INDIA:

In online trading, there are various facilities in India like,

The investor has to register with an online trading portal and get into an agreement

with the firm to trade in different securities following the terms and conditions

listed down on the agreement.

The order processing is done in correct timings as the servers of the online trading

portal are connected to the stock exchanges and designated banks all round the

clock.

They can also get updates on the trading and check the current status of their

orders either through e-mail or through the interface.

Brokerages also provide research content on their websites, such that the clients

can take their own decisions on stocks before investing.

PRODUCTS AND SERVICES OF THE ONLINE TRADING IN INDIA:

The major financial products and services of the online trading India are as follow:

Equities

Mutual funds


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Life insurance

General insurance

Loans

Share trading

Commodities trading

Portfolio management

Financial Planning.

TRADING THROUGH THE INTERNET:

The safety of transactions on the Internet depends on the encryption system used. The

better this transaction system, the more difficult it is for any person to hack the site. The

best system available today is the 128-bit encryption, a system, which evens the Pentagon

uses. ICICI direct.com is one of the few online share-trading sites in the country equipped

with this 128-bit encryption. Investors can ensure the safety of the transactions online.

Investors normally get a secured user id and password, the secrecy of which is to be

maintained entirely by you. If the transaction system requires no manual intervention,

you further improve the safety in the transactions. This enables the elimination of the

possibility of any manual intervention. This means orders are directly sent to the

exchange ensuring that you get the best and right price.

2.6 BENEFITS OF ONLINE TRADING:

The following are the major benefits of online trading:

EASY AND EFFICIENT:

Online trading has made it possible for anyone to have easy and efficient access to more

reports and charts than it was previously possible if one went to any; discount broker‟s

office. Investors can benefit from the discounted brokerage fees charged on electronic

transactions.


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INFORMATION:

We have access to a lot more information online to self teaches ourselves.

Online trading also provides the information for the Customer service through

Email or Chat.

Through the online tools like market watch, graphs and recommendations to do

analysis of stocks.

Real time stock trading without calling or visiting broker's office.

Display real time market watch, historical data, graphs etc.

Check the trading history; Demat account balance and bank account balance at

any time. Set alert to inform you certain activity on the stock through email or

sms.

Enables investors to watch the trade execution details and to track their portfolios

online.

Place offline orders for buying or selling stocks.

Secure transactions.

Eliminates bad deliveries, counterfeit signatures, theft and mutation of shares,

being the major problems that plague trading of securities.

Facilitates cross-border transactions and helps in avoiding the intensive need for

intermediaries.

ADDITIONAL POWER:

Online trading has left room for smaller organizations to compete with

multinational organizations since size is no longer a legit issue. Being online does

not identify the size of any particular organization; therefore, this gives additional

power to the underdogs.

PHYSICAL LOCATION:

Online trading has allowed companies to locate themselves where they want, as

„physical location‟ is not an issue anymore. Companies can establish themselves

according to their gains and losses, for instance, where tax (sales and value-added

taxes) are best suited to them.


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CONTROL TO INDIVIDUALS:

Online trading gives control to individuals and they can exercise it over their

accounts thus comprehend what is going on when they; trade. It is like going back

to school and re-educating oneself on how to trade online.

COST PER TRADE IS LESS:

Individuals benefit by saving comparatively a lot more when trading online as the

cost per trade is less.

VARIETY OF PRODUCTS:

Individuals can invest in a variety of products, unlike earlier when people bought

bonds.

Mutual funds and stocks for long-term basis and sat on them.

Now they can invest in stocks, stock and index options, mutual funds, individual,

government, corporate, municipal bonds, various types of IRA account,

mortgages, and even insurance.

TRADING IN GLOBAL MARKET:

Online trading has made it possible for one to find investment options that were

not available on a regular basis, like offbeat net stocks, eccentric unique things

and trading in global market.

In short, online trading makes it easier and cheaper for investors to access the securities

market.

2.7 THE ROLE OF DEPOSITORIES IN ONLINE TRADING:

Technology has changed the face of the Indian stock markets in the post-liberalization

era. Competition amongst the stock exchanges, increase in the number of players, and

changes in the trading system led to a tremendous increase in the volume of activity.

The traditional settlement and clearing system proved to be inadequate due to operational

inefficiencies. Hence, there emerged a need to replace this traditional system with a new

system called the “Depository System”.


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Depository, in very simple terms, means a place where something is deposited for

safekeeping. A depository is an organization which holds securities of a shareholder in an

organization which holds securities of a shareholder in an electronic form and facilitates

the transfer of ownership of securities on the settlement dates. According to section 2(e)

of The Depository act.1996, “Depository means a company formed and registered under

the Companies Act,1956 and which has been granted a certificate of registration under

section 12(I A) of the Securities and Exchange Board of India Act,1992.”

The depository system revolves around the concept of paperless or scrip less trading

because the shares in a depository are held in the form of electronic accounts, that is, in

dematerialized form. This system is similar to the opening of an account in a bank where

in a bank will hold money on behalf of the investor and the investor has to open an

account with bank to utilize its services.

Cash deposits and withdrawals are made in a bank, in lieu of which a receipt and bank

passbook are given, while in depositories, scrips are debited and credited and an account

statement is issued to the investor from time to time. An investor in a bank deals directly

with the bank while an investor deals through a depository participant in depository.

An effective and fully developed depository system is essential for maintaining and

enhancing market efficiency, which is one of the core characteristics of a mature capital

market.

1. THE DEPOSITORY PROCESS:

There are four parties in a Demat transaction: the customer, depository participant,

depository, and share registrar and transfer agent(R&T):

Step: 1 Opening an Account:

An investor who wants to avail of the services will have to open an account with the

depository through a depository participant, who could either be a custodian, a bank, a

broker, or individual with a minimum net worth of Rs 1 crore. The investor has to enter


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into an agreement with the DP after which he is issued a client account number or client

ID number.

Step: 2 Dematerialization:

To convert his physical holdings of securities into the dematerialized form, the investor

makes an application to the DP in a dematerialization request form (DRF). Within seven

days, the DP forwards the form, along with the security certificates, to the issuer or its

registrar and transfer agent after electronically registering the request with the depository.

The depository electronically forwards the demat request to the respective issuer or its

registrar and transfer agent, who verifies the validity of the security certificates as well as

the fact that DERF has been made by a person recorded as a member in its register of

members.

After verification, the issuer or its registrar and transfer agent authorizes an electronic

credit for the security in favour of the client. Thereafter, the depository causes the credit

entries to be made in the account of the client.

Dematerialization Process:

1. Client/investor submits the DRF (Demat Request Form) and physical certificates

to DP. DP checks whether the securities are available for Demat. Client defaces

the certificate by stamping „Surrendered for Dematerialization‟. DP punches two

holes on the name of the company and draws two parallel lines across the face of

the certificate.

2. DP enters the Demat request in his system to be sent to Depositories. DP

dispatches the physical certificates along with the DRF to the R&T Agent.

3. Depositories record the details of the electronic request in the system and forward

the request to the R&T Agent.

4. R&T Agent, on receiving the physical documents and the electronic request,

verifies and checks them. Once the R&T Agent is satisfied, dematerialization of

the concerned securities is electronically confirmed to Depositories.


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5. Depositories credit the dematerialized securities to the beneficiary account of the

investor and intimate the DP electronically. The DP issues a statement of

transaction to the client.

Step: 3 Rematerialisation:

To withdraw his security balance with the depository, the investor makes an application

to the depository through it DP. He requests for the withdrawal of balance in his account

in a rematerialisation request form (RRF). On receipt of the RRF, the participant checks

whether sufficient free relevant security balance is available in the client‟s account. If

there is, the participant accepts the RRF and blocks the balance of the client to the extent

of the rematerialisation quantity and electronically forwards the request to the depository.

On receipt of the request, the depository blocks the balance of the participant to the extent

of the rematerialisation quantity in the depository system. The depository electronically

forwards the accepted rematerialisation application to the issuer or its registrar agent,

which is done on daily basis.

The registrar and transfer agent confirm electronically to the depository that the RRF has

been accepted. Therefore, the issuer or registrar, and transfer agent dispatches the share

certificates arising out of the rematerialisation request within 30 days.

Rematerialisation Process:

1. Investor requests the DP for rematerialisation.

2. The depository participant informs it to the depositories.

3. Depositories intimate the Registrar and transferor agent.

4. The Registrar of the company prints certificates with new numbers and informs

depositories.

5. Depositories adjust its account and passes on the details to the DP.

6. The certificates are dispatched to the investor.


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Step: 4 Distributing Dividend:

A company (issuer) or its registrar and transfer agent shall make known the depository of

the corporate actions such as dates for book closures, redemption or maturity of security,

conversion of warrants and call money from time to time. The depository will then

electronically provides a list of the holdings of the clients as on the cut-off date. The

company can then distribute dividend, interest and other monetary benefits directly to the

client on the basis of the list. If the benefits are I the form of securities, the company or

its registrar and transfer agent may distribute these, provided the newly created security is

an eligible security and the client has consented to receive the benefits through

depository.

Step: 5 Closing an account:

A client wanting to close an account shall make an application in the format specified to

that effect to the participant. The client may close his account if no balances are

outstanding to his credit in the account. If any balance exists, the account may be closed

in the following manner.

(i) By rematerialisation of all its existing balances in his account and/or

(ii) By transferring his security balances to his other account held either with the

same participant or with a different participant.

The participant shall ensure that all pending transaction have been adjusted before closing

such an account. After ensuring that there are no balances in the client‟s account, the

participant shall execute the request for closure of the client‟s account.

2. DEPOSITORY SERVICES IN INDIA:

India has two depository service providers. The National Securities Depository Limited

(NSDL) was incorporated on 8 November 1996.

The Central Depository services Limited (CSDL) was incorporated in 1999 as the second

depository, to provide depository services to the investors. The depositories are required

to operate within the legal framework of:


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Depository Act, 1996

SEBI ( Depositories and Participants) Regulations,1996

SEBI‟s guidelines issued from time to time

Bye-Laws

Business Rules

The bye-laws and business rules are designed by the depository bases on the above to

govern its functioning and operational procedures, and also that of its business partners.

We will discuss the procedure of NSDL as CDSL‟s procedure will not be significantly

different from that of NSDL as it has to follow the same legal framework to operate.

2.8 ONLINE TRADING IN BSE AND NSE:

Though there are many stock exchanges in India but the major stock exchanges are BSE

and NSE. Major aspects related with NSE and BSE are as under:

1. BOMBAY STOCK EXCHANGE:

Bombay Stock Exchange Limited (the Exchange) is the oldest stock exchange in Asia

with a rich heritage. Popularly known as "BSE", it was established as "The Native Share

& Stock Brokers Association" in 1875. It is the first stock exchange in the country to

obtain permanent recognition in 1956 from the Government of India under the Securities

Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role in the

development of the Indian capital market is widely recognized and its index, SENSEX, is

tracked worldwide.

Earlier an Association of Persons (AOP), the Exchange is now a demutualised and

corporatized 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).Bombay Stock Exchange Limited

received its Certificate of Incorporation on 8th August, 2005 and Certificate of

Commencement of Business on 12th August, 2005. The 'Due Date' for taking over the


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business and operations of the BSE, by the Exchange was fixed for 19th August, 2005,

under the Scheme. The Exchange has succeeded the business and operations of BSE

ongoing concern basis and its recognition as an Exchange has been continued by SEBI.

The Exchange has a nation-wide reach with a presence in 417 cities and towns of India.

The systems and processes of the Exchange are designed to safeguard market integrity

and enhance transparency in operations. During the year 2004-2005, the trading volumes

on the Exchange showed robust growth.

OBJECTIVES:

One of the objectives of the Exchange is to promote and inculcate honourable and just

practices of trade in securities transactions and to discourage malpractices.

BSE ORGANIZATION STRUCTURE:

In terms of organization structure, the Board formulates larger policy issues and exercises

over-all control. The committees constituted by the Board are broad-based. The day-to-

day operations of the Exchange are managed by the Managing Director & CEO and a

management team of professionals.

TRADING:

The Exchange provides an efficient and transparent market for trading in equity, debt

instruments and derivatives.

The BSE's On Line Trading System (BOLT) is a proprietary system of the Exchange and

is BS 7799-2-2002 certified. The surveillance and clearing & settlement functions of the

Exchange are ISO 9001:2000 certified Trading on the BOLT System is conducted from

Monday to Friday between 9:55 a.m. and 3:30 p.m. The scrips traded on the Exchange

have been classified into 'A', 'B1', 'B2','T', „S', „TS' „F‟,'G' and 'Z' groups.


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2. NATIONAL STOCK EXCHANGE:

The National Stock Exchange (NSE) is India's leading stock exchange covering various

cities and towns across the country. NSE was set up by leading institutions to provide a

modern, fully automated screen-based trading system with national reach. The Exchange

has brought about unparalleled transparency, speed & efficiency, safety and market

integrity. It has set up facilities that serve as a model for the securities industry in terms

of systems, practices and procedures. NSE has played a catalytic role in reforming the

Indian securities market in terms of microstructure, market practices and trading

volumes.

The market today uses state-of-art information technology to provide an efficient and

transparent trading, clearing and settlement mechanism, and has witnessed several

innovations in products & services viz. demutualization of stock exchange governance,

screen based trading, compression of settlement cycles, dematerialization and electronic

transfer of securities, securities lending and borrowing, professionalization of trading

members, fine-tuned risk management systems, emergence of clearing corporations to

assume counterparty risks, market of debt and derivative instruments and intensive use of

information technology.

THE ORGANIZATION:

The National Stock Exchange of India Limited has genesis in the report of the High

Powered Study Group on Establishment of New Stock Exchanges, which recommended

promotion of a National Stock Exchange by financial institutions (FIs) to provide access

to investors from all across the country on an equal footing. Based on the

recommendations, NSE was promoted by leading Financial Institutions at the behest of

the Government of India and was incorporated in November 1992 as a tax-paying

company unlike other stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts (Regulation) Act,

1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM)


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segment in June 1994. The Capital Market (Equities) segment commenced operations in

November 1994 and operations in Derivatives segment commenced in June 2000.

MARKET TIMINGS:

Trading on the equities segment takes place on all days of the week (except Saturdays

and Sundays and holidays declared by the Exchange in advance). The market timings of

the equities segment are:

Normal Market Open : 09:55 hours

Normal Market Close : 15:30 hours

The Closing Session is held between 15.50 hours and 16.00 hours

Limited Physical Market Open : 09:55 hours

Limited Physical Market Close : 15:30 hours

MARKET SEGMENTS:

The Exchange operates the following sub-segments in the Equities segment:

1. Rolling Settlement:

In a rolling settlement, 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.

At NSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working

day. For arriving at the settlement day all intervening holidays, which include bank

holidays, NSE holidays, Saturdays and Sundays are excluded. Typically trades taking

place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so

on.


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2. Limited Physical Market:

Pursuant to the directive of SEBI to provide an exit route for small investors holding

physical shares in securities mandated for compulsory dematerialized settlement, the

Exchange has provided a facility for such trading in physical shares not exceeding 500

shares. This market segment is referred to as 'Limited Physical Market' (small window).

The Limited Physical Market was introduced on June 7, 1999.

3. Institutional Segments:

The Reserve Bank of India had vide a press release on October 21, 1999, clarified that

inter-foreign-institutional-investor (inter-FII) transactions do not require prior approval or

post-facto confirmation of the Reserve Bank of India, since such transactions do not

affect the percentage of overall FII holdings in Indian companies. (Inter FII transactions

are however not permitted in securities where the FII holdings have already crossed the

overall limit due to any reason).

To facilitate execution of such Inter-Institutional deals in companies where the cut-off

limit of FII investment has been reached, the Exchange introduced a new market segment

on December 27, 1999. The securities where FII investors and FII holding has reached

the cut-off limit as specified by RBI (2% lower than the ceiling specified by RBI) from

time to time would be available for trading in this market type for exclusive selling by FII

clients. The cut off limits for companies with 24% ceiling is 22%, for companies with

30% ceiling, is 28% and for companies with 40% ceiling is 38%. Similarly, the cut off

limit for public sector banks (including State Bank of India) is 18% whose ceiling is 20%.

The list of securities eligible / become ineligible for trading in this market type would be

notified to members from time to time.

4. Trade for Trade Segment:

Trading in this segment is available only for the securities, which have not established

connectivity with both the depositories as per SEBI directive. The list of these securities

is notified by SEBI from time to time.


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SECURITIES AVAILABLE FOR TRADING:

The Capital Market (Equities) segment of NSE facilitates trading in the following

instruments:

A. Shares

Equity Shares

Preference Shares

B. Debentures

Partly Convertible Debentures

Fully Convertible Debentures

Non Convertible Debentures

Warrants / Coupons / Secured Premium Notes/ other Hybrids

Bonds

C. Units of Mutual Funds

CIRCUIT BREAKERS:

The Exchange has implemented index-based market-wide circuit breakers in compulsory

rolling settlement with effect from July 02, 2001. In addition to the circuit breakers, price

bands are also applicable on individual securities.

Index-based Market-wide Circuit Breakers:

The index-based market-wide circuit breaker system applies at 3 stages of the index

movement, either way viz. at 10%, 15% and 20%. These circuit breakers when triggered

bring about a coordinated trading halt in all equity and equity derivative markets

nationwide. The market-wide circuit breakers are triggered by movement of either the

BSE Sensex or the NSE S&P CNX Nifty, whichever is breached earlier. In case of a

10% movement of either of these indices, there would be a one-hour market halt if the


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movement takes place before 1:00 p.m. In case the movement takes place at or after 1:00

p.m. but before 2:30 p.m. there would be trading halt for ˝ hour.

In case movement takes place at or after 2:30 p.m. there will be no trading halt at the 10%

level and market shall continue trading. In case of a 15% movement of either index, there

shall be a two-hour halt if the movement takes place before 1 p.m. If the 15% trigger is

reached on or after 1:00p.m. But before 2:00 p.m., there shall be a one-hour halt. If the

15% trigger is reached on or after 2:00 p.m. the trading shall halt for remainder of the

day. In case of a 20% movement of the index, trading shall be halted for the remainder of

the day.

These percentages are translated into absolute points of index variations on a quarterly

basis. At the end of each quarter, these absolute points of index variations are revised for

the applicability for the next quarter. The absolute points are calculated based on closing

level of index on the last day of the trading in a quarter and rounded off to the nearest 10

points in case of S&P CNX Nifty.

TRADING SYSTEM:

NSE operates on the 'National Exchange for Automated Trading' (NEAT) system, a fully

automated screen based trading system, which adopts the principle of an order driven

market. NSE consciously opted in favor of an order driven system as opposed to a quote

driven system. This has helped reduce jobbing spreads not only on NSE but in other

exchanges as well, thus reducing transaction costs.

2.9 SYSTEM OF ONLINE TRADING IN INDIA

The internet trading system in India will be a combination of manual and automated

system. This is because it will be a technological nightmare to interface the existing

banking system with the Internet trading system and given the inadequacies of the

communication network across the country. Eventually, these issues will be resolved to

achieve a seamless integration of the concerned entities with the Internet trading system.


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The following diagram shows the information flow in selling of securities:

7

4 1 7

6

2 3

4

5

5 5

Fig. 2.1

ONLINE TRADING SYSTEM WORK IN INDIA

1. SELLING OF THE SECURITIES:

Selling of the securities involves the following steps:

BANK

Internet

NSDL DEPOSITORY

PARTICIPANT

INVESTOR

S

INTERNET

BROKER

STOCK

EXCHANG


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Step - 1: In order to sell securities, the investor will visit the web site of the broker.

Step – 2: The website will be the „broker‟s shop‟ and will provide all facilities to conduct

trading operations. „This is a fully automated operation without the intervention of the

broker or his staff. Having decided the trade, he keys in details of the securities, quantity

and his „offer‟. The broker‟s system will first check with the depository participant of the

investor the details of securities, which the investor plans to, sell, and if in order, connect

the investor to the stock exchange.

Step – 3: The system will respond. It will either confirm or decline the „offer‟.

Step – 4: On confirmation of the trade, the investor issues the necessary instructions to

his depository participant to arrange for delivery of the securities on account of the broker

to NSDL.

Step – 5: This step is manual but some of depository participants are offering this facility

online through a website. On the settlement day, the clearing house /clearing corporation

of the stock exchange receives the securities from NSDL.

Step – 6: The clearing house/clearing corporation arranges payment to the broker

Step – 7: The broker deposits the payment in the investor‟s account.

2. BUYING OF SECURITIES:

Step 1: In order to buy securities the investor will visit the website of the broker.

Step 2: The investor should be qualified by the broker to trade on account. Having

decided the trade, he keys in details of the securities, quantity and his „bid‟. The system

first confirms whether the deal is within the approved limit. If yes, the system will

connect the investor to the stock exchange.

Step 3: The system will respond. It will either confirm or decline the „bid‟


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Step 4: On confirmation of the deal, the investor issues the necessary instructions to his

bank t arrange payment to the broker. This step is manual.

Step 5: On settlement day, the clearing house/clearing corporations of the stock exchange

will payout the securities to NSDL on account of the broker/investor. The broker arranges

to pay the clearing house/clearing corporation.

Step 6: NSDL‟s system credits the investor‟s depository account.

In above process, you will observe that the trading system is „paperless‟ and fully

automated, except the „banking operations‟ and „instructions for the delivery of the

securities‟.

2.10 TYPES OF ONLINE TRADING SYSTEM

The US pioneered the commercialization of Internet technology. In the early 90s, the

Internet trading system was developed as one of its commercial applications. The US

broker‟s community embraced EDI in the 80s but was slow to adopt the Internet

technology because information and data that communicated through the network was

considered to be insecure. The technologies were not available to facilitate quick

navigation. K. Aufhauser & Co., Inc. was the first brokerage firm to offer Internet trading

in 1994.This Company was taken over by Ameritrade.

However by 1996, most f the UA brokers offered Internet trading to their investors:

Charles schwab, E*Trade, Suretrade to name a few. Today US brokerage firms are

expanding their operations globally. They have set up shops in Europe, Japan, Indonesia,

South Korea, Taiwan, Singapore, Malaysia, and Hong Kong and now they are looking at

India. The application of the Internet into trading of securities requires the development

of new methodology and business models t encourage global market expansion, as it is

possible to trade from anywhere at any time. To facilitate Internet trading, US

entrepreneurs developed a system called the „Alternative trading system‟, an additional

trading floor on the Internet and regulated it separately from the other modes of trading.


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This model has been incorporated by some countries into their existing systems, while

others have developed and incorporated an „order routing system to their existing trading

systems and regulated them as another mode of conducting transactions. At present, there

are two Internet trading systems-the „Alternative Trading System (ATS) „and the „Order

Routing System (ORS)‟.

Fig. 2.2

Internet trading system

BANK

Internet

NSDL DEPOSITORY

PARTICIPANT

INTERNET

BROKER

STOCK

EXCHANG

7

6

5

4

4

3

2

1

INVESTOR

S


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1. ALTERNATIVE TRADING SYSTEM (ATS):

ATS are exchange –like entities that trade securities and provide investors with additional

proprietary electronic trading facilities for securities that are traded principally on

securities exchanges or other organized markets, the secondary markets. It enables

investors to lower their transaction s costs.

It matches orders to buy or sell stock in specific quantities at specific prices in private

transactions between customers, some of which are brokers, some institutions or some

individuals.

In the US, nine Electronic Communication Networks operate as market participants

within the NASDAQ network. These ATSs display either one-or-two-sided quotes, which

reflect actual orders , and provide institutions and market makers with an anonymous way

enter orders into the marketplace.

ATS IN INDIA

The introduction of ATS in India will require a major review of some of its policies and

notifications, a process which could take time. For example, some provisions of the

/securities Contracts (Regulation) Act 1956 that require review and amendments. These

are enumerated below:

Legal frame work to recognize ATS as additional trading floor: In India, the Securities

Contracts (Regulation) Act 1956 deals with regulation and control of contracts in

securities. The provisions of Sections2 (f), 13, 13A, 19 and 23 in particular require

recognition of ATS as a stock exchange or as an additional trading floor. The existing

legal framework does not permit this.

Interest of general investors or the securities market: The inadequacies of the current

regulations to offer protection to the interest of the investors and the securities market

through the ATS.


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Specialized products: The ATS cannot be used for offering specialized products like

over-the –counter and other contracts, as such contacts are prohibited under the

notification no.2561 dated 27 June 1969, issued under Section 16(1) of the Act, which

states that:“ no person save with permission of Central Government can enter into any

contract for sale or purchase of securities other than such spot delivery contract or

contract for cash or hand delivery or special delivery in any securities as is permissible

under the SC® Act and the rules, bye-laws and regulation of a RSE…”

2. ORDER ROUTING SYSTEM (ORS):

An Order Routing Internet trading system directs investor‟s

securities/trade/transactions/deals from an investor/broker (client) terminal to the stock

exchange terminal or a system that routes matched trade/transactions/deals to the stock

exchange terminal or to that of a broker. The order touting system enables an investor to

execute his trade with his computer using Internet to connect to the proprietary network

of the stock exchanges available at the broker‟s website. It eliminates the delay, increase

efficiency, transparency, ensures timely execution of trade with all the necessary safety

and integrity features which are mandatory for a seamless transaction.

Based on an agreement with the broker, an investor can log into the broker‟s website

using an access or authorization code and receive onscreen quotes. He can then key his

trade, which goes to the mainframe of a stock exchange through a control system of the

broker. What this means is that the deal will be governed under the exposure/margin limit

of the broker concerned. An effective order routing system brings an unprecedented level

of efficiency to the order flow process as it utilizes technology to route orders of the

investors to the brokers on to the stock exchange, reducing any time lag between their

order and its execution on the exchange.

ORS IN INDIA

The Internet trading system authorized by SEBI routed „securities trade‟ through brokers

registered with the stock exchange only.


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This system would require broker interface for trade execution on the registered stock

exchange. It is in no way different to the existing system, except that the process has been

wired and is now online anywhere within the trading hours of the stock exchanges.

2.11 INTERNET AND SECURITY OF INTERNET TRADING

The success of Internet technology lies in its basic characteristics-ubiquitous; open to

everybody, easy to use, inexpensive when compared to other comparable technologies,

flexible enough to handle a wide array of applications and above all, its global reach.

Stock exchanges around the world have embraced this new technology because of the

demands placed on them by the community of Internet users with a penchant for

convenience, Internet savvy products and services. India has now extended the trading in

its stock exchanges over the Internet.

Internet fulfils the basic information required by an individual to conduct business over

the net.

1. TECHNOLOGICAL FOUNDATION OF INTERNET:

The technological foundation of the Internet lies in distributed computing, a methodology

by which computing can be done over several computers concurrently that are linked to

each other in a network.

2. TELNET AND FILE TRANSFER PROTOCOL (FTP):

TELNET OR FTP OR TCP/IP ARE NOT APPLICATIONS

People can logon to remote computers on the Internet using common transfer protocol

mechanisms or naming schemes. Telnet is one such mechanism used to create virtual

interactive sessions on remote machines to communicate with the hosts. It allows users to

logon to remote computers from their computer and provides the same service that of any

user would get if he/she used a modem to dial into their computer. As soon as the user


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has telnetted he/she can access search tools, files and databases which their system

previously could not have done.

For Telnet to, work computers that are being used need to have the Telnet software

installed in their service and the user either needs an account on whichever remote

computer he/she is accessing or has to make use of public Telnet sites. The two main

things Telnet needs to work are: the Telnet site‟s address, and the Login word. Simply

put, the user needs to type „telnet‟ at the prompt and the site‟s address to activate the

TELNET protocol. Another commonly used transfer protocol is the File Transfer

Protocol (FTP). This is used to transfer files r information packets between both non-

TCP/IP and TCP/IP networks.

It allows users to logon to remote computers, gives access to the computers‟ directories

and allows the user to copy files on to their machine. In general, the FTP protocol is used

to get files from computers on the Internet that are freely available to the public as

distributed documents, shareware or distributed software.

There are three things FTP needs to work: the site address where file is located, the

directory that file is in, and the name of the file (filenames are case sensitive).

3. TCP/IP (TRANSPORT CONTROL PROTOCOL/INTERNET

PROTOCOL):

TCP/IP is a suite of protocols that provide reliable transmission of data packets over the

Internet.

It is a very low-level communications protocol that holds together the Internet by

handling routing and error control. Most information packets are transferred over a

TCP/IP network through the use of Internet Protocol (IP) addresses of both the sender

and the receiver. The Internet Protocol (IP) takes place in the network layer of the Open

Systems Interconnect (OSI), which is a reference model that defines architecture for

communication throughout a network so that different systems can interconnect via

computers and communication devices.


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This model was developed in 1978 by International standards Organization (ISO) to

accommodate all of the services a Local Area Network (LAN) should provide. There are

seven layers in the model (physical, data link, network, transport, session, presentation,

and application), each of which provides a different service of the LAN. The network

layer is responsible for end-to-end routing of packets or blocks of information, collecting

billing and accounting information, and routing messages. It is important to specify that

the Transport Control Protocol (TCP) takes place in the transport layer of the Open

Systems Interconnect (OSI).

The Transport layer generates addresses for the end-user and makes sure all blocks or

packets of data have been received without being lost in transmission and without being

duplicated. The Transport Control Protocol (TCP) is responsible for guaranteeing end-to-

end message delivery and proper sequencing. In some cases, even the data packet might

have an IP address depending on its location on the network. IP is a standard for

transferring data over a communication s network and breaking the message into packets

and addressing, now used by many networks for LSN/WAN (wide area network) routing.

The sender and the receiver are identified solely by their unique IP addresses.

The type of server used on the network also determines the security level of the data

packets being transferred. If a secured server using the secured socket layers (SSL) such s

the TCP/IP networks is in use, the data packets cannot be modified when being

transferred. If an insecure server is utilized, then the security level of your data packets is

close to zero.

A closed lock appearing in the lower right corner of your browser‟s windows identifies

an SSL server. It is not too difficult for computer hackers to hijack these data packets on

the network and either redirect them or modify their contents. The TCP/IP network gives

a litter more security to the data packets than the insecure servers. Due to the TCP/IP

compatibility with other common transfer mechanism protocols, computer hackers can

find ways to hijack the secured data packets.


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So as to protect data packets on the Internet, new technology has been developed for

network security such as user authentication, cookie files, and encryption.

4. OSI (OPEN SYSTEM INTERCONNECT):

This model has seven layers that guide in the development of international standards for

networks of computers-namely the Internet. The layers are as follows, starting with

physical layer as the most bottom one: physical Layer, Data Link Layer, Network Layer,

Transport Layer, Session Layer, Presentation Layer, and Application Layer.

Application Layer:

Determines the data to be transmitted, the message or record format for the data, and the

transaction codes that identify the data to the receiver.

Presentation Layer:

Responsible for encryption, compression and conversion from one transmission code to

another.

Session Layer:

Enforces the rules for carrying on the dialogue and tries to re-establish the connection if a

failure occurs.


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Fig. 2.3

Open Systems Interconnect-OSI Reference Model

Transport Layer:

Generates the address of the end user and ensures that all blocks or packets of data have

been received, that there are no duplicate blocks and that blocks have not been lost in

transmission.

Network Layer:

Network layer is a Responsible for end-to-end routing of packets or blocks of

information, colleting belling and accounting information and routing the messages.

APPLICATION

PRESENTATION

SESSION

TRANSPORT

NETWORK

DATA LINK

PHYSICAL

Formats Data it

receives from

Application Layer

Generates end-

user addresses,

ensures receipt

Connect between

one nodeto next.

Physical path of

communication

Specifies electrical

connection between

medium and

computer system

End-to-end routing

of packets/blocks of

information

Establishes

connection between

applications

Functionally

defined by

end - user


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Data Link Layer:

Establishes and controls the physical path of communication to the next node.

Physical Layer:

Physical layer is a Specifies the electrical connections between the transmission medium

and the computer system.

5. SECURITY OF INFORMATION ON THE NET

Technologies have, therefore, been developed to add security to information on the net.

This is an ongoing process as security requirements only increase with time. The validity

of any business transaction, whether on the net or otherwise, is based on its

authentication, integrity, privacy and non-repudiation. These are the four pillars on which

a business or commercial deal stands. Let us understand each one of them.

AUTHENTICATION:

This involves comparing the user name and password to a list of authorized users and

their passwords. It determines that the message, which has been sent, comes from the

person/organization who claims to be the sender.

INTEGRITY:

To ensure that the information entered by the „investor‟ has not been tampered by a third

party.

PRIVACY:

To ensure that the inputted (entered) data has not been intercepted and read by a third

party.


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NON-REPUDIATION:

To ensure that either party cannot refuse having sent or having received their respective

messages. For example, it should not be possible for an „investor‟ to report that he did not

place an order to „buy or sell‟ securities. At the same time, it should not be possible for

the „broker‟ to pretend that he did not receive the order to „buy or sell‟ securities. The

Internet, as a media, does not support any of the above parameters. Hence, technologies

are being developed to permit sharing of authentic, integral, private and non-repudiable

information.

6. SECURITY ISSUES AND MEASURES:

In 1999, Delotte & Touche and The Information Systems Audit and Control Association

(ISACA) conducted a worldwide study of several aspects of e-commerce with specific

emphasis on security measures enforced. This study included personal interviews and

written survey responses from audit and information professionals in over 40 countries.

According to the study, websites generally use several overlapping measures, which

include:

Virus scanning following the space of virus attacks in 1999

Firewalls to prevent unwanted intrusions

Password authentication

Intrusion detection

Secure socket layer (SSL) encryption.


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Fig. 2.4

Security Measures in Place

2.12 WHY INVESTORS PREFER ONLINE TRADING?

Investors feel that they have control over their accounts, can make their own

decisions and don‟t have to give reasons for their actions.

Investors are independent.

Investors have a reason to participate in the market and learn about it.

Investors find it interesting, cheap, easy, fast and convenient.

A lot of information is online so investors can keep up-to-date with what is

happening in the trading world.

Investors are sure and confident.

Investors have access to numerous tools to invest, and can create their own

portfolio.

2.13 LIMITATION OF THE ONLINT TRADING

Now Here Are the Possible Limitation of the online trading as given below:

Virus Scanning 90%

Firewalls 85%

Password Authentication 75%

7575%

Intrusion Detection 60%

Secure Socket Layer (SSL) Encryption 55%

55%


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NETWORK CRASHES:

When network crashes, there will be problems and delays due to a large influx of

traffic and rapid online trading criteria. For instance, on 27 October1997, there

was a one-day crash, which caused online trading on the New York Stock

Exchange to stops and brokers were unable to conduct business.

DECISION:

Individuals are restricted to first-hand financial guidance. This simply means that

the individual is himself/herself alone to make the decision.

TAX:

Tax (sales tax and value-added tax) evaluation becomes an issue, especially when

you are trading internationally.

INADIQUACY OF THE INFORMATION:

Chances are that one has no idea who one is dealing with on the other end, so it is

advisable to gather all the possible information about the party one is dealing

with. In short, do the homework and be prepared.

BROKERAGES:

Online trading has left individuals open to too much information. This is harmful

since it leaves brokerages wide open to sensitive data.

MARKET CRASHES:

Is online trading badly for your portfolio? The more one trades the less returns

one gets, meaning that an addicted trader to think they know the market.

TECHNOLOGY:

Individuals think that they are trading with the market directly and know what

they are doing, but the truth is that even though technology has taken over; the

basic rules of trading are the same. It seems that the middleman has been

removed, but that is not so. When the individual clicks on the mouse, his trade

goes through a broker. The commissions online pertain to the intermediary.

EFFECTIVE COMMUNICATION:

There is a need for more effective communication links over the interest and the

ability of the server to deal with a large volume of visitors.


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Above given the minuses point of online trading, if some care should be taken by the

investors so, some of the limitations are remove it.

2.14 CARE SHOULD BE TAKEN BY ONLINE TRADING

INVESTORS

However, analysts pointed out that online trading could be associated with some risks

such as encouraging active day trading, leading the overall market to be more vulnerable

to volatility and speculative deals.

Therefore, online investors should be aware of the following:

Online trades can be executed in few seconds, investors and traders must take

their time to make wise investment decisions.

Online trading requires high concentration as some investors place their orders

more than once mistakenly assuming that the orders have not been executed,

hence ending up either owning more than the amount demanded or with selling

stocks they don‟t own.

In fast moving markets, delays may occur due to the rush of orders placed on the

market at the same time, combined with quick price changes, online traders might

end up with transactions executed at different prices than wanted.

Some investors protect themselves by placing limit orders rather than market

orders, where a limit order is an order to buy or sell a security at a specific price,

so a buy limit order can only be executed at the limit price or lower, and a sell

limit order


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REFERENCES:

1. Dr. Agarwala, K.N, and Agarwala Deeksha., “Bulls, Bears & Mouse” – an

Introduction to Online Stock Market Trading. Macmillan Publishing House.

2. Gala Jitendra, “Guide to Indian Stock Market”. Buzzing Stock Publishing House.

3. www.wikipedia.org/wiki/Online_trading_community

4. www.amateur-investor.net/history_of_online_stock_trading.htm

5. www.bseindia.com/downloads/GrowthofOn-lineTrading.pdf

6. www.wikipedia.org/wiki/origin of stock market

7. www.wikipedia.org/wiki/ history of stock market

8. www.financialexpress.com

9. www.bseindia.com

10. www.nseindia.com

11. www.capitalmarket.com

http://www.wikipedia.org/wiki/Online_trading_community

http://www.amateur-investor.net/history_of_online_stock_trading.htm

http://www.bseindia.com/downloads/GrowthofOn-lineTrading.pdf

http://www.wikipedia.org/wiki/origin

http://www.wikipedia.org/wiki/stockmarket

http://www.financialexpress.com/

http://www.bseindia.com/

http://www.nseindia.com/

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