Chapter 5 - Trading Clearing & Settlement : Introduction


In this chapter we are going to discuss about how actual trading and settlement takes place in exchanges. On each of the exchanges, thousands of orders get matched with each other during the course of a trading cycle. Even though for each trade there is a buyer-broker and a seller-broker, they never interact with each other for the settlement of that trade. Their interaction is only with the settlement agency of their exchange. Before understanding the procedure of trading and settlement, it is important to have an overview of the changes that have taken place in the Indian securities market in the past decade.

The three most noticeable changes which have taken place are: a) Dematerialisation b) Introduction of screen-based trading and c) Shortening of trading and settlement cycles (now stock exchanges follow the T+2 days settlement cycle). The Depositories Act was passed by the parliament in 1995 and this paved the way for conversion of physical securities into electronic ones. With the introduction of screen based trading - thereby removing the earlier system of open outcry where prices of securities were quoted by symbols - there has been a significant change in the level of technology used for the operation of the stock market.

Now all the transactions happen through computers across a network that is spread across the country and connected to exchanges through VSAT. These two factors combined together have helped in reducing the trading and settlement cycle in the Indian securities market which has been reduced from as long as 22 days to two days.

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