13.2 Functioning of trading networks

Hanumant Dhokle

Online trading

When an investor informs a broker to place an order on his behalf, the broker enters the order through his PC, sends a signal to the satellite via VSAT/leased line/modem. The signal is directed to the mainframe computer at exchange via VSAT. A message relating to the order activity is broadcasted to the respective member. The order confimation message is immediately displayed on the PC of the broker. On the matching of the order, a message is broadcast to the respective member.

The trading system operates on a strict price / time priority. All orders received on the system are sorted with the best priced order getting the first priority for matching i.e. the best buy orders match with the best sell orders. Similar priced orders are sorted on time priority basis i.e. the one that came in early gets priority over the one that came in later. Orders are matched automatically by the computer keeping the system transparent, objective and fair. Where an order does not find a match, it remains in the system and is displayed to the whole market, till a fresh order comes in or the earlier order is cancelled or modified. Unlike the outcry system a trader can now take advantage of tremendous flexibility in terms of:

Time. For example, immediate or cancel order (IOC) allows the user to buy or sell a security as soon as the order is released into the system, failing which the order is cancelled from the system. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately.

Price. For example, limit the buy or sell order or give stop loss order which is an order to buy or sell securities in which you specify the maximum price per unit in case of a buy order and the minimum price per unit in case of a sell order. The actual transaction can be at a price more favorable than the price specified. This is the same for both NSE and BSE. A stop loss order allows you to place an order which gets activated only when the market price of the relevant security reaches or crosses the specified price. The price specified is the stop loss trigger price. A stop loss order can be placed only with a limit price.

Volume. For example, an order with a disclosed quantity (DQ) allows the user to disclose only a portion of the order quantity to the market. Thus if the order quantity is 10,000 and the disclosed quantity is 2,000, then only an order of 2,000 is released to the market. After this quantity is fully matched, a subsequent quantity of 2,000 is disclosed. Thus, totally five disclosures with the same order number are shown one after the other in the market. With the introduction of online trading, it is now possible to access complete market information online. The market page on the screen, at any point of time, provides the entire data related to the total order depth in a security, the five best buys and sells available in the market, the quantity traded during the day in that security, the high and low, the last traded price etc. Moreover, as an investor you can also track the progress of your orders as soon as they are placed with trading members. So when you place an order it is visible to all market participants and thereby it is termed as an 'open book'.

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