A STUDY ON IMPACT OF INFORMATION TECHNOLOGY IN INDIAN

STOCK MARKET: WITH SPECIAL REFERENCE TO NSE & BSE

Paper III: Seminar Presentation

(Pre – PhD, Part I Examination - 2015)

Seminar paper presented in partial fulfillment of the Pre-PhD Examination in

Department of Commerce and Business Administration

Submitted by

Gangineni Dhanaiah

Research Scholar

(Regd no Y14 COMR 021)

Research Director

Dr. R. Siva Ram Prasad

Co-ordinator,Department Of Commerce & Business Administration

Acharya Nagarjuna University

Department of Commerce & Business Administration

Acharya Nagarjuna University

Nagarjuna Nagar – 522 510, Andhra Pradesh

January 2015

1. INTRODUCTION

In India, Capital markets are playing an increasingly important role, with the stock exchanges

acting as their fulcrum. Stock Exchange as an institution has long history in India dating back

100 years ago. Over the years, price discovery has become more efficient, transactions have

become faster, safer and cheaper, number of investors has risen and markets have become

globalized. Indian markets have become larger, deeper, diversified and more modernized.

IT plays a dominant role in the management of Stock Exchange World over. IT has

transformed the working of Stock Exchange in the global scenario. The rapid advances in

information technology have determined important changes and innovation in the operation

of Stock Exchange. Information Technology advances have produced, and continue to

determine important changes also in the way trading activity is carried out, thereby affecting

market dynamics, price formation mechanism and price volatility. IT has impact on

management of Stock Exchange through reporting and surveillance activity, allows regulators

to assess the adequacy of any regulatory measures in place.

We present in the following tables statistics and data relating to

a) Miles stones in the history of Indian stock market development

b) The chronological introduction of automation in stock exchanges around the

world

c) A description of latest data relating to market participants in Indian securities

market.

Table 1: Important mile stones of evolutionary development of Indian stock market

Date Event

1875 1. Formation Native share and stock brokers association

1957 2. BSE Granted permanent recognition

1986 3. Sensex Lunched

1992 4. Empowerment of SEBI

1992 5. SEBI Formulated “Insider trading regulations

1994 6. Establishment of NSE

Nov 1994 7. Trading in Equities at NSE

1995 8. BSE On-line trading system (BOLT) introduced

1996 9. Commencement of NSDL

Apr 1996 10. Launch of CNX NIFTY

Feb 2000 11. Commencement of Internet trading

Jun 2000 12. Commencement of Derivatives trading (Index

Futures)

Dec 2000 13. Commencement of WAP trading

Apr 2002 14. Shift to T+3 settlement

Apr 2003 15. Shift to T+2 rolling settlement

Jun 2004 16. Launch of STP interoperability

2005 17. Incorporation of BSE limited

Nov 2010 18. Launch of mobile trading

Source : Various annual reports of SEBI and NSE

Table 2. Some automated stock exchanges around the world

Country Exchange System Year of automation

Australia ASX SEATS 1987

Canada TSE TOREX 2000

France Paris CAC 1986

Germany FWB XETRA 1997

Hong Kong SEHK HKTS 1993

Italy Milan GTB 1991

Japan TSE CORES 1982

Mexico BMV SENTRA 1996

Singapore SSE CLOB 1987

Switzerland SWX SWX 1995

Spain SSE SIB 1991

USA NYSE ABS 1991

USA NASD SOES 1985

Source : World federation of Exchanges (WFE)

Table 3: Market Participants in Securities Market

Market Participants FY 2012 FY 2013 FY 2014Depositories 2 2 2Stock exchanges ( Nation wide)

2 2 3

Brokers ( Cash Segment) 10268 10128 941Brokers ( Equity Derivatives) 2337 2957 3051Sub-brokers ( Cash Segment) 77141 70242 51885

Source : Indian Securities market review , 2014

Table 4. No of Listed Companies in India

Year NSE BSE

2011-12 1646 5133

2012-13 1666 5211

2013-14 1688 5366

Source : ISMR 2014

2. LITERATURE REVIEW

There are extensive studies, reports and books available on Indian Stock market. We have

reviewed some literature pertaining to the topic under study. The relevant literature is

reviewed on basis of books, periodicals, newspapers and websites. The detailed review is

given below.

Cardella,et.al(2014) in their study entitled “Computerization of the Equities, Foreign

Exchange, Derivatives and Fixed Income Markets” surveyed empirical studies on the

development and effects of increased computerization across various financial markets. The

researchers find that there have been dramatic changes in certain derivative markets, foreign

exchange and in particular equity markets. The research has found positive effects of

computerization on measures of market quality, but the survey highlights that human

intermediation is still prominent and beneficial in certain areas.

In a report entitled “ The future of computer trading in financial markets” published by

Government office for Science reports that there is no direct evidence that high frequency

computer based trading gas increased volatility.

Surti & Desai (2013) in their study measures the impact of increase in trading hour on Indian

Stock Exchange. For this study primary data are collected through structured questionnaire

from Bardoli region and for this purpose three different questionnaires were prepared that is

for branch manager, relationship manager and customers. To measure the reliability of the

survey reliability test is used.

Bhunia & Ghosal ( 2011) in the paper titled “ An impact of ICT on the growth of capital

market –empirical evidence from Indian Stock Exchange” investigate the impact of ICT on

the growth of the Indian Stock Exchange using a modified version of the Gompertz

technology diffusion model introduced by Chow (1983) and accordingly reshuffles the model

with ICT development. The results of the study reveal that preferred variables are appreciably

affected by information and communication technology more than ever in respect of

amplifying the number of stock brokers, investors and admittance to ICT.

Ming-Chi Lee (2009) in a study entitled “Predicting and explaining the adoption of online

trading: An empirical study in Taiwan” investigates how stock investors perceive and adopt

online trading in Taiwan. We developed a research model which integrates perceived risk,

perceived benefit and trust, together with technology acceptance model (TAM) and theory of

planned behaviour (TPB) perspectives to predict and explain investors' intention to use online

trading. The model is examined through an empirical study involving 338 subjects using

structural equation modelling techniques.

Report on Indian Exchanges (2009) by IDFC research describes that transparency, annuity

revenues; high operating leverage and solid entry barriers make exchanges a near-perfect

business. The report further argues that Indian Exchanges are almost on par with global peers

in terms of corporate structure and sophistication of systems, Indian Exchanges are gathering

scale. As elucidated in the report exchanges have been around for centuries, but the business

model continues to strengthen with the industry increasingly gaining depth.

Shah, etal (2008) in the book titled “ India’s Financial Markets” observes that the public

equity market within India, both spot and derivatives, takes place almost entirely at the two

exchanges – NSE and BSE. There is an open electronic limit order book (ELOB) with order

matching by the trading computer. The author reports that the processes of organized

financial trading in India have focused on Exchanges.

In a paper titled “politics of market micro-structure”, John (2007) describes the rapid

technological change that characterized Indian financial markets in the last three decades of

twentieth century by increasing the opportunity costs of maintaining India’s unreformed

equity market microstructure. The author argues that India eventually adopted many latest

innovations, leapfrogging from archaic market institutions and practices in the early 1990s to

international best practices at the beginning of new millennium. The paper further elucidates

that by 2001, reforms brought India up to par with the global standards for every aspect of its

equity market microstructure.

Jain & Johnson (2006) in their article titled “Trading Technology and Stock Market

Liquidity: A Global Perspective” expound on technological revolution that swept financial

markets around the world. Computerization and satellite communication have transformed

the organization of stock exchanges and improved secondary market liquidity.

Lee (2002) in the paper titled “The future of securities exchanges” presents a range of

predictions about securities exchanges. The author analyzes that historically, exchanges have

had seven main types of revenues: 1) Membership subscription, fees for 2) Listing, 3)

Trading 4) Clearing and 5) Settlement and charges for the provision of 6) Company news and

for 7) quote and trade data. In the paper four broad themes related to securities exchanges are

discussed concerning information, industry, governance and politics.

3. RESEARCH GAP

Making observations from the review of literature, it can be concluded that there is no precise

study which addresses the impact of Information technology on Stock market development

either in the Indian context or in International background. Hence, this study may be treated

as pioneer work on the impact of IT on stock exchanges in promotion of capital market.

Although there is no dearth of work on stock exchanges and capital market but no one has

addressed the key issues. By and large the works relate to price behaviour, market efficiency,

market uncertainty, market crash & scams and market reactions to corporate events.

The capital markets are the back bone of the economy and have a crucial role in the

consolidation and development of Industrial sector. These capital markets depend upon the

effectiveness and organisational mechanism of stock exchanges that play a cardinal role in

promoting the level of capital formation through effective utilization of domestic savings and

by attracting foreign capital for long term purposes. Thus there is need to verify as to what

extent stock exchanges are impacted by automation. Therefore, present study examines the

impact of IT in Indian stock market.

Until now the majority research has focused on developed countries financial markets.

Therefore this topic in the Indian Context needs lengthy analysis and more research attention.

The present study is an addition to the existing body of knowledge as very scanty work is

available in this area of research in case of India. There are very few journal articles and

publications related to the area under study.

4. NEED & SIGNIFICANCE OF THE STUDY

Information Technology has transformed the stock market from the periodical disruptions of

a market functioning from a hall with gesticulating and open outcry to usage of VSATs,

leased lines and uninterrupted uplinking on all trading hours.

The study is significant as all over the world investments in securities are making an

unprecedented growth. With the advent of computerization complimented by the advent of

internet and online trading becoming a reality, it has become relevant to study the extent of

impact created by the process of Information Technology in the Stock Exchanges.

The study aims to highlight the impact of information technology in terms of reduction in

transaction costs, ensuring market integrity, fair and transparent prices for participants,

effective surveillance on fraudulent practices. the Indian Stock Market. The study will point

to further research regarding the progressive growth of Indian Stock Market and role of IT.

5. STAMENT OF THE PROBLEM

5.1 ) Floor-based Trading prior to 1994

Equity trading in India was dominated by FBT on BSE upto late 1994. This process had

several problems of non-transparency and illiquidity. The non-transparency of the FBT

led to market abuse such as investor being charged higher prices for purchases compared

with actual prices traded on the floor. During this period it was not possible for the

investors to cross check the prices.

The BSE was located in Bombay the primitive state of telecom in India coupled with the

use of FBT, greatly limited market access to investors outside Bombay. It also generated

low liquidity for the market as a whole, by being unable to access the order flow from

outside Bombay

5.2) Scenario Post-Screen Based Trading

NSE built an electronic order matching system where computerization of trading took

place it used satellite communications to make this highly accessible from locations all

over the country. Electronic trading place role in reducing search costs for market

participants.

5.3).Trading Mechanism, Settlement system, Trading efficiency &

Dematerialization

The researcher wood like to study how electronic trading systems and automation

a) Reduced manipulation of Prices and hiding of Audit trails of such manipulation.

b) Ensured that investors received time based priority and correct price for their

trades

c) Fundamentally changed the BSE , NSE as they were allowed to extend

electronically nation wide from 1996-97

d) How the initiatives facilitated by implementation of IT reduced transaction costs

in Indian stock market.

e) How the wide-spread usage of IT will safe guard market integrity and act as a

effective check for instances of fraudulent trading

6. OBJECTIVES OF THE STUDY

1) To study automation infrastructure scenario of Indian stock exchanges such as NSE

and BSE in comparison with the exchanges of developed countries

2) To compare the pre-technology era of Indian Stock Market to post-technology era

3) To identify the Information Technology Impact parameters in the stock market

4) To analyze the Impact parameters and interpret using various statistical methods.

.

5) To study the satisfaction of stake holders of Indian stock market regarding Information

Technology implementation.

7. HYPOTHESES

1. Indian Stock Exchanges today are at par with developed international stock exchanges

in terms of use of IT.

2. There has been substantial increase of investor satisfaction by IT implementation

3. There has been substantial reduction in transaction costs due to IT implementation in

Indian Stock Market

4. There has been substantial increase in efficiency of regulation & surveillance by stock

exchanges using IT implementation.

8. RESEARCH DESIGN

Research design is the conceived plan and structure of investigation to obtain answers to

research questions.

SELECTION OF SAMPLE

8.1) Exchanges:

NSE

BSE

Sample of around 100 professionals from various fields like Officials from exchanges,

Academicians related to financial markets, Journalists and Analysts from financial media

including press and electronic media will be contacted for the required information.

8.2) Brokers

Around 100 Members of Exchanges (Brokers) will be identified and will be contacted for

data collection which is 10% of the total brokers in the Stock exchanges

8.3) Investors

Investors in equity market were contacted and questionnaires were collected with

information on impact parameters.

Sample of 800 investors from various cities will be contacted.

Data Collection & Resources

Sources of Data

Primary Data

Primary data is proposed to be collected through questionnaires and also personal interviews

and schedules of officials of stock exchanges, brokers and investors will be used for data

collection. Observations, Interaction and Interview methods will be used.

Secondary Data

The research is also based on desk research based on secondary data compromising of

published reports of various institutions. The data also gets derived from RBI, SEBI

publications, directives and circulars, committee reports,books,research publications both

published and unpublished. Electronic media and websites of stock exchanges, business

news papers like Economic Times, Business Standard, Business Line and magazines related

to stock market were utilized for the study.

The collected data would be subjected to proper recording,editing,classification,tabulations

and interpretations as per the well established practice of social research methodology.

Secondary data is collected from the following sources

- Research Journals

- PhD and M Phil dissertations

- Various central and state govt publications

- Public records and statistics

- Books, Magazines, News papers and periodicals

- Other relevant websites

Sampling Procedure

The questionnaire approach will be used for the collection of primary data. In this study the

primary data will be collected from 800 investors. Questionnaire will be distributed through

on-line platform through websites and offline platform through various sections of people.

Questionnaires will be hand delivered to many people while personal interviews will also be

taken to ensure a degree of objectivity in the survey data, selected investors will be personally

interviewed to verify the accuracy of the self reported data. The responses will be received

from those investors who wish to contribute to research willingly.

Steps were taken as far as possible to ensure that the respondents were selected impartially

and they would give a true representation of the sample.

The researcher proposes to use purposive sampling technique and snow ball sampling

technique and wants to collect information from employees of members of exchanges,

broking companies, Investors and market experts including academicians and experts from

financial media.

Statistical Tools & Techniques

Several methods will be adopted for analyzing the relevant data and drawing conclusions. For

the purpose of analyzing the data appropriate statistical techniques are used.

The analysis part of the present research will be made by using various statistical tools like

ANOVA, Correlation analysis, Percentage analysis and Software packages like Excel &

SPSS.

9. LIMITATIONS OF THE STUDY

1. The study considers only two exchanges. NSE and BSE as there is nil trading on other

regional stock exchanges.

2. The study is limited to data available with Exchanges.

3. The study is limited to the sample size of 600 investors in Indian stock market

10. Chapter Scheme

Chapter No Proposed Contents

Chapter I Introduction

Chapter II Review of Literature

Chapter III Role of IT Indian Stock Market

Chapter IV Research Design

Chapter V Analysis of Data

Chapter VI Findings, Suggestions and Conclusions

References

Appendices

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