1

PROJECT
REPORT
ON

ON-LINE TRADING

Introduction to the capital market

 2

The capital market is the market for securities, where companies and the government
can raise long term funds. The capital market includes the stock market and the bond
market. Financial regulators ensure that investors are protected against fraud. The capital
markets consist of the primary market, where new issues are distributed to investors, and
the secondary market, where existing securities are traded.

Capital market thus plays a vital role in channelizing the savings of individuals for
Investment in the economic development of the country. As a result the investors are not
constrained by their individual abilities, but by the abilities of the companies, which in
turn enhance the savings and investments in the country, liquidity of capital market is an
important factor affecting growth.

Since projects require long term finance, but on the other hand, the investor may not like
to relinquish control over their savings for a long time. A liquid stock market ensures a
quick exit without incurring heavy losses or costs. Thus development of efficient market
system is necessary for creating conductive climate for investment and economic
growth.

Capital market Segment – Primary And Secondary

 3

Broadly , the comprises of two segments – the new issue market which is
commonly known as primary market and the stock market which is known as
secondary market.
Primary
A primary offering, such as with a corporate bond, means you are buying it
directly from the issuer, at par value, usually. A secondary market is where you
sell or buy existing issues. I.E. If you bought a bond last year, now need to get
your principal, you can sell it in the secondary market. You may not get par value.
If rates are up since you bought the bond, then you will likely have to sell it at a
discount to be able to get rid of it. If rates have fallen since you bought it, you
could get a premium for it.
Secondary

The market where securities are traded after they are initially offered in the primary
market. Most trading is done in the secondary market. To explain further, it is trading in
previously issued financial instruments. An organized market for used securities. Bombay
Stock Exchange (BSE), National Stock Exchange NSE, bond markets, over-the-counter
markets, residential mortgage loans, governmental guaranteed loans etc

Secondary Market refers to a market where securities are traded after being initially
offered to the public in the primary market and/or listed on the Stock Exchange. Majority
of the trading is done in the secondary market. Secondary market comprises of equity
markets and the debt markets. For the general investor, the secondary market provides an
efficient platform for trading of his securities. For the management of the company,
Secondary equity markets serve as a monitoring and control conduit—by facilitating
value-enhancing control activities, enabling implementation of incentive-based
management contracts, and aggregating information (via price discovery) that guides
management decisions.

INDIAN CAPITAL MARKET AT GLANCE

 4

180 Trading of shares of east India company in Kolkata And

0 Mumbai

185 Joint stock company came into existence

0

186 Speculation and feverish dealing in securities

0

187 Formulation of stock exchange of Mumbai

5

189 Formulation of Ahmadabad stock exchange

4

1.
2020th century

1908 Formulation of Calcutta stock exchange

1939 Formulation of Lahore and madras stock exchange

1940 Formulation of U.P and Delhi stock exchange

1956 Securities contract and regulation act enacted

1957 Scam of Haridas Mundhra

1988 Securities and exchange board of India set up

1991 Scam of MS Shoes

1992 SEBI given power Under SEBI act,1992

1993 Formation of National stock exchange

1995 HARSHAD MEHTA Scam

1995 SESA GOA Scam

1997 CRB scam

 5

1998 BPL And Videocon Scam

21st century

2000 Depositories came into existence (electronic form of

shares)

2001 Ketan Parekh scam

2002 Start of rolling settlement and banning of Badla trading
2002 Introduction of T+3 settlement in April
2003 Introduction of T+2 settlement in April
2005 BSE Sensex touches all time high 6954 in January
2006 BSE Sensex touches all time high 12500,the highest
intraday fall of 1100
2007 BSE reaches the level of
2008 BSE touches all time high in January 2008
2008 Sensex saw its highest ever loss of 1,408 points at the end
of the session.
2008 Sexsex saw its 15 month low,from its all time high
2009 Sexsex saw its down trend & highest ever loss because of
Satyam case.
 6

BRIEF ABOUT THE STOCK EXCHANGES

Stock Exchange is a market like any other centralized market where

both buyers and sellers come and conduct their business of purchase and sale of shares &
securities. In other words, it is a market place for shares and securities where trading
takes place in a controlled and protected environment.

MEANING OF STOCK EXCHANGE

A stock exchange, share market or bourse is a corporation or mutual organization which

provides "trading" facilities for stock brokers and traders, to trade stocks and other
securities. Stock exchanges also provide facilities for the issue and redemption of
securities as well as other financial instruments and capital events including the payment
of income and dividends. The securities traded on a stock exchange include: shares issued
by companies, unit trusts and other pooled investment products and bonds. To be able to
trade a security on a certain stock exchange, it has to be listed there. Usually there is a
central location at least for recordkeeping, but trade is less and less linked to such a
physical place, as modern markets are electronic networks, which gives them advantages
of speed and cost of transactions. Trade on an exchange is by members only. The initial
offering of stocks and bonds to investors is by definition done in the primary market and
subsequent trading is done in the secondary market. A stock exchange is often the most
important component of a stock market. Supply and demand in stock markets is driven by
various factors which, as in all free markets, affect the price of stocks (see stock
valuation).

There is usually no compulsion to issue stock via the stock exchange itself, nor must
stock be subsequently traded on the exchange. Such trading is said to be off exchange or
over-the-counter. This is the usual way that bonds are traded. Increasingly, stock
exchanges are part of a global market for securities.
 7

CONCEPT OF SHARE TRADING

The concept of share broking emerged after the establishment of the joint stock companies. The
ownership of the companies was divided into small parts and that every part was called share. So,
the term “Share” denominates some part in the ownership of the company. The shares are freely
transferable subject to the some certain restrictions. When the need was felt to sell the shares by
the owner of the shares, it was difficult to find out the buyers of the shares who want to buy the
shares at the price the seller want to sell. At that time a need was felt to bring the buyers and
sellers on a common platform. To solve this problem, a group of persons came into picture, which
used to bring the buyers and sellers together for the trade of the shares. These persons are called
the share Brokers who find the persons who wish to buy or sell their securities. The whole
process of finding the buyers and sellers of the securities by the brokers is called the Share
Broking.

The origination of the Indian securities market may be traced back to 1975, when 22 enterprise
brokers under a Banyan tree established the Bombay Stock Exchange (BSE). Over the last 130
years, the Indian securities market has evolved continuously to become one of the most dynamic,
modern international standards both in terms of structure and in terms of operating efficiency.
 8

Brief about india infoline limited

India Infoline Limited, together with its subsidiaries, provides various financial services
primarily in India. It offers a range of products and services comprising wealth
management, credit and finance, insurance, asset management, and investment banking,
as well as retail and institutional equities, and commodities broking services. The
company also provides equity research services, portfolio management services, mutual
funds, life insurance, fixed deposits, GoI bonds and other small savings instruments, and
loan products, as well as equities, derivatives, and commodities trading services. In
addition, it owns and manages the Websites, www.indiainfoline.com and
www.5paisa.com. The company’s customers include foreign institutional investors,
banks, consulting firms, and corporate customers. As of March 31, 2010, it had over
2,300 business locations in 450 cities and towns in India. The company was founded in
1995 and is headquartered in Mumbai, India.

Details

Index Membership: N/A

Sector: Financial

Industry: Investment Brokerage - National

Full Time Employees: 13,174

 9

Data provided by Capital IQ, except where noted.

Valuation Measures

Market Cap (intraday)5: 18.86B

3
Enterprise Value (22-Mar-2011) : 33.64B

Trailing P/E (ttm, intraday): 10.08

Forward P/E (fye 30-Mar-2012)1: N/A

PEG Ratio (5 yr expected)1: N/A

Price/Sales (ttm): 1.53

Price/Book (mrq): 1.13

Enterprise Value/Revenue (ttm)3: 2.73

Enterprise Value/EBITDA (ttm)3: N/A

Financial Highlights

Fiscal Year

Fiscal Year Ends: 30 Mar

Most Recent Quarter (mrq): 30-Dec-2010

Profitability

Profit Margin (ttm): 18.43%

Operating Margin (ttm): 26.53%

Management Effectiveness

Return on Assets (ttm): N/A

Return on Equity (ttm): N/A

Income Statement

Revenue (ttm): 12.32B

Revenue Per Share (ttm): 42.77

Qtrly Revenue Growth (yoy): 11.70%

Gross Profit (ttm): 8.88B

EBITDA (ttm): N/A

Net Income Avl to Common (ttm): 2.27B

Diluted EPS (ttm): 6.71

Qtrly Earnings Growth (yoy): 12.70%

Balance Sheet

Total Cash (mrq): 7.96B

 10

Total Cash Per Share (mrq): 28.54

Total Debt (mrq): 22.29B

Total Debt/Equity (mrq): 127.34

Current Ratio (mrq): N/A

Book Value Per Share (mrq): 59.71

Cash Flow Statement

Operating Cash Flow (ttm): N/A

Levered Free Cash Flow (ttm): N/A

SETTLEMENT CYCLE SCHEDULE

SR. NO. DAY DESCRIPTION OF ACTIVITY TRADE

1 T Trading Day
2 T+2 PAY IN BY 10.30 am.
3 T+2 PAY – OUT BY 2 pm.
4 T+3 Auction of shortage in deliveries
5 T+5 Auction pay-in by 10.30 (1 am/ pay
Out by 2 pm.)
 11

Functions of Stock Exchange

Stock exchange is established into the main purpose of providing a market place
for the members to deal in securities under well laid down regulations and to protect the interest
of the investors. The main functions of stock exchange are;

1. It brings the companies and investors together so that the investors can put risk capital
into companies and thus, companies can use the capital.
2. It provides an orderly regulated market for securities.
3. It provides continuous, ready and open market for selling and buying securities.
4. It promotes savings and investment in the economy by attracting funds from the
investors.
5. It facilitates take overs by means of acquiring majority of shares traded on the stock
market.
6. It acts as a clearing house of business information.
7. It motivates the managers of well reputed companies, to retain their shares in ‘A’ group,
to improve performance.
 12

8. It induces the managers to improve performance for converting non-specified shares into
specified shares in the exchange.
9. It enables the investors to evaluate the net worth of their holdings.
10. It also allows the companies to float their shares in the market.

OBJECTIVES OF THE STUDY

• To Study & understood the concept of Online trading.

• To know the time information & importance & the role played by the stock
exchanges in the process of online trading.
• To know the reasons for the introduction of online trading and their Benefits.
• To review the changes that Online trading brought when compared with the
previous systems.
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On Line Trading
 14

Meaning of Online Trading

“Change is the law of nature”. There were times when man was a wanderer or a normal. He
himself had to go place to place in search of food, water and now everything is available at your
doorstep just at the click of the mouse. The growth of information technology has affected almost
all sectors of life. Internet has enabled us to get every information at our doorstep. When Internet
has affected all sectors he could “stock markets” the most important player of the economy, has
remained far behind? Like all other sectors Internet has set its feet in the stock markets also.

Internet trading commissions are clearly posted on the websites of the various services, and are
typically a fixed rate charge, depending upon the type of security being traded and the size of
trade. In theory, therefore, an Interest investor always knows what commission he is being
charged on each trade. Internet investors can take as much time as they would like to take prior to
placing a trade order. Similarly the online investor likely does not have to worry that his broker is
making unauthorized trades. Since there is no individual broker making a commission, the only
person who is authorized to trace in a the account is the actual investor. Furthermore, the internet
investor can never become a victim of excessive trading (where for the broker) since the investor
maintains total control over the number of transactions which take place in the account.

All of these positive features of internet trading may lead the unwary investor to believe that
Internet trading is a way to take control of their finances and save more money in the process.
Unfortunately, this is not always the case. The advantages of Internet stock trading have also its
weaknesses and these weaknesses present significant drawbacks for the average investor.
 15

First and foremost, the average investor is not an expert in the financial markets. There is a
danger for allowing the autonomy of online trading to hull you into the belief that you are an
expert investor. An online investor sitting at home at a personal computer also foregoes proper
investment advice and financial planning, perhaps among the most valuable services provided by
traditional brokers.

There are, of course, additional risks relative to performing transactions over the Internet
especially on a shared computer. Those people whom investors have provided their account
number and password can freely trade that account while the investor will have little, if any,
resource against the brokerage firm for the breach of security.

When was online trading introduced in INDIA?

Online trading started in India in February 2000 when a couple of brokers started offering an
online trading platform for their customers.
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ONLINE TRADING BY NSE & BSE

The central computer located at the Exchange is connected to the workstations of the
Brokers through satellite using Very Small Aperture Terminals (VSATs). Orders placed
at the Brokers' workstations reach the central computer and are matched by the computer
based on price and time priority.

Both the exchanges have switched over from the open outcry trading system to a fully
automated computerized mode of trading known as BOLT (BSE On Line Trading) and
NEAT (National Exchange Automated Trading) System. It facilitates more efficient
processing, automatic order matching, faster execution of trades and transparency. The
scrips traded on the BSE have been classified into 'A', 'B1', 'B2', 'C', 'F' and 'Z' groups.
The 'A' group shares represent those, which are in the carry forward system (Badla). The
'F' group represents the debt market (fixed income securities) segment. The 'Z' group
scrips are the blacklisted companies. The 'C' group covers the odd lot securities in 'A',
'B1' & 'B2' groups and Rights renunciations. key regulator governing Stock Exchanges,
Brokers, Depositories, Depository participants, Mutual Funds, FIIs and other participants
in Indian secondary and primary market is the Securities and Exchange Board of India
(SEBI) Ltd.
 17

DIFFERENCE BETWEEN ONLINE AND OFFLINE

TRADING
Nevertheless, with all the convenience of online trading there are still investors
who prefer the old fashion way of offline trading. Offline trading has lost some
popularity but it is still the main form of investing. Offline trading offers many benefits
as well.

1. The one benefit that an investor appreciates the most is that they are not alone when
making investment decisions.

2. There are experienced and professional brokerage companies that handle their
investments for them.

3. Investors are not faced with the challenge of making these vital investment decisions;
especially, if they do not have the experience necessary to make the appropriate
investments.

4. Also, there is someone there to answer any questions that may cause concerns. Not to
mention, with offline trading mistakes are less likely to take place. No one wants to throw
their money away or stand by and watch someone else throw their money away. It may
be wise to hire a professional to assist you in making the correct investment decisions if
you feel you lack the knowledge necessary.

Points of difference between online trading and ofline trading are as follows:
1. Online trading is very expensive as compare to manual trading or offline trading.

2. Online trading consumes less time as compare to manual trading.

3. Online trading has very helpful to finding the records easily but offline trading takes
more time to finding the records.

4. In the help of online trading, there is no chance of any errors while doing the trading.
in offline trading there are some errors exist like barriers of communication .

5. With the help of online trading, we know the international market rate of share very
easily.
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DEMATERIALISATION OF SHARES

Dematerialization is the process wherein shares certificates or other securities held in

physical form are converted into electronic form and credited to demat account of an
investor opened with a depository participant. SEBI has made compulsory trading of
shares of all the companies listed in stock exchanges in demat form with effect from 2nd
January 2002.The procedure of opening a demat account with DP is similar to opening an
account with a bank.

ELECTRONIC SETTLEMENT OF TRADE

A. Procedure for purchasing dematerialized securities

The procedure for purchasing dematerialized securities is also similar to the procedure for
buying physical securities.

1. Investor instructs DP to receive credits into his account in the prescribed form. There
may be one time standing instruction or separate instruction each time to receive
credits.
2. Investor purchases securities in any of the stock exchanges linked to depository
through a broker.
3. Broker receives payment from investor and arranges payment to clearing corporation.
4. Broker receives credit to securities in clearing account on the payout day.
5. Broker gives instructions to DP to debit clearing account and credit client’s account.
Investor receives shares into his account by way of book entry.
 19

B. Procedure of selling dematerialized securities

The procedure for selling dematerialized securities in stock exchanges is similar as selling
physical securities. The only major difference is that instead of delivering physical securities to
the broker, the investor instructs his DP to debit his demat account with the number of securities
sold by him and credit the brokers clearing account. The procedure for selling dematerialized
securities is given below:

1. Investor sells securities in any of the stock exchange linked to depository through
a broker.
2. Investor instructs his DP to debit his demat account with the number of securities
sold and credit the broker’s clearing account.
3. Before the pay-in-day, broker of the investor transfers the securities to clearing
corporation.
4. The broker receives payment from the stock exchange.
5. The investor receives payment from the broker for sale of securities in the same
manner as received in case of sale of physical securities.

REMATERILISATION OF SHARES

Rematerialization is the process of conversion of electronic holdings of securities

into physical certificate form. For rematerilisation of scrips, the investor has to fill up a
remat request form (RRF) and submit it to the DP. The DP forwards the request to
depository after verifying the investor’s balances. Depository in turn initiates the
registrars and transfer agent or the issuer company. RTA/ Company prints the certificates
and dispatches the same to the investor.
 20

Market timings:

Trading on the derivatives 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 derivatives segment are:

Normal Market / Exercise Market Open time : 09:15 hours

Normal market close : 15:30
hours
Set up cut of time for Position limit/Collateral value : till
15:30 hrs
Trade modification end time / Exercise Market : 16:15
hours

Advent of online trading

The history of e-trading goes back to 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 dozen of 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, some day everyone would own computers and invest
through them with unprecedented efficiency and control. And today his dream has become a
reality.
 21

SHARE OF ONLINE TRADING IN TOTAL CASH TURNOVER

OF NATIONAL STOCK EXCHANGE
Table 1.1(Year 2003)

MONTH CASH ONLINE RATIO(%)

TURNOVER(cr.) TURNOVER(cr.)
January 64,762.24 1,923.34 2.97
Feb 48,289.18 1,559.07 3.23
March 43,159.93 1,302.69 3.02
April 48,971.31 1,425.83 2.91
May 54,690.14 1,981.36 3.62
June 61,585.35 2,142.41 3.48
July 78,877.63 2,720.59 3.45
August 85,346.58 3,301.88 3.87
September 1,03,345.50 3,825.88 3.70
October 1,15,595.32 4,344.33 3.76
November 92,885.71 4,024.02 4.33
December 1,10,372.64 5,876.21 5.32

Source: Ludhiana stock exchange

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TABLE-1.2 (Year 2004)

MONTH CASH TURNOVER ONLINE TURNOVER RATIO

January 1,34,268.72 6,015.04 4.48
February 1,08,718.06 5,170.01 4.76
March 1,04,876.53 4,330.23 4.13
April 1,00,951.17 5,244.27 5.20
May 98,919.93 5,187.01 5.24
June 84,898.47 5,358.95 6.31
July 93,836.13 6,819.45 7.27
August 86,855.72 6,192.31 7.13
September 88,508.05 6,976,.41 7.88
October 75,697.32 6,261.90 8.27
November 82,035.27 7,490.16 9.13
December 1,15,593.10 11,000.62 9.52

Source: Ludhiana Stock Exchange

Table 1.3(Year
2222222222200520
MONTH CASH TURNOVER
ONLINE TURNOVER RATIO
 23

January 68,718.95 1,251.84 . 1.82

February 49,563.77 917.80 1.85

March 44,262.50 868.85 1.96
April 53,320.02 914.73 1.72
May 54,979.06 1,237.28 2.25
June 44,241.07 1,108.66 2.51
July 51,398.43 1,290.57 2.51
August 46,113.05 1,310.78 2.84
September 46,498.62 1,318.01 2.84
October 51,902.22 1,476.51 2.85
November 51,351.48 1,639.28 3.19
December 61,973.34 1,915.65 3.09
Source: Ludhiana Stock Exchange

TABLE-1.4(Year 2006)

MONTH CASH TURNOVER ONLINE TURNOVER RA TIO

April 57,229.44 5.85 0.01

May 79,036.68 29.1 0 0.04
June 1,19,373.43 88.58 0.07
July 1,10,056.22 97.49 0.09
August 1,25,347.04 165.09 0.13
September 1,42,479.78 229.98 0.16
October 1,06,854.21 190.18 0.18
November 1,22,731.11 350.79 0.29
December 1,31,414.65 366.75 0.28
Source: Ludhiana Stock Exchange

TABLE-1.5(year 2007)
 24

ONLINE TURNOVER
MONTH CASH TURNOVER RATIO
(RS. CRORES)
January 1,48,829.84 1,130.49 0.76
Februmy 1,35,932.23 1,573.62 1.16
March 60,226.21 849.81 1.41
April 35,615.63 268.9 0.76
May 48,329.11 343.92 0.71
June 42,783.00 238.47 0.56
July 27,227.76 401.68 1.48
August 29,417.15 388.98 1.32
September 35,322.82 453.58 1.28
October 35,326.454 604.17 1.71
November 42,132.23 805.86 1.91
December 54,467.79 1,048.24 1.92
Source: Ludhiana Stock Exchange

Internet Based Trading through Order Routing Systems

 25

Internet based trading on conventional exchanges, uses the Internet as a medium for
communicating client orders to the exchange, through broker web sites. Broker’s web sites may serve a
variety of functions. These may include;

• Allowing the clients to directly trade through investors;

• Advertise the broker dealers’ services to potential investors;
• Offer market information and investment tools similar to those offered by information vendor
or SRO web sites;
• Offer real-time or delayed quote information, continuously update quotes while the user visits
other sites, or allow investors to create a personal stock ticker;
• Provide market summaries and commentaries, analyst reports and trading strategies and
market data on currencies, mutual funds, options, market indices and news; and
• Offer investors access to portfolio management tools and analytic programs;
• Information on commission and fees; and
• Account information and research reports.

In an Order Routing system, a broker offering Internet trading facility provides an electronic
template for the customer to enter the name of the security, whatever it is to be bought or sold, the
quantity and whatever the order is a market or limit order. Once the broker’s system receives this
information.

Use of Internet as Alternative Trading Systems (Provision for price discovery

and matching outside conventional exchanges)

In foreign jurisdiction, Alternative trading systems have been developing outside conventional
securities markets, which provide investors with additional proprietary electronic trading facilities for
 26

securities that are traded principally on securities exchanges, or other organized markets. They have price
discovery functions, matching systems and crossing systems. The systems that are currently in use in
outside jurisdictions are closed systems and are not accessible to the general public through the Internet.
The securities markets regulators abroad the maintained flexible and open policies designed to encourage
innovation in the secondary securities markets. As a result, a number of market participants, usually
broker-dealers, have developed computerized “alternative trading systems” by which the system
centralize, display, match, cross or otherwise execute trading interest.

Use of Internet for making Initial Public Offerings

Issues of securities of using the Internet to communicate directly with their shareholders,
potential investors and analysts by disseminating corporate information. In foreign jurisdiction, they are
also using the Internet to communicate to the public for the following:

• Public offerings;
• Private offerings; and
• Disclosure and communication
Issuers are using the Internet to market themselves to potential investors. The Internet is also being used
for fulfilling necessary disclosure requirements, for disseminating the prospects in electronics form and
even for receiving share applications in public issues electronically. In India, SEBI has taken initiative in
permitting use of the network of stock exchange for collection of investor applications in public offerings
by the issuer companies.

Investment Advisory Services

 27

Brokers as well as other service provides such as investment firms, research outfits etc. are using
the Internet for marketing and advertising purposes, for presenting information on portfolio analysis and
market information, and for communicating with and receiving orders from potential investors. The
services offered by the service providers to the investors are generally the following:

• Advertising
• Providing investment information and investment advice;
• Underwriting
• Communicating with the investors;
• Customer orders; and
• Record keeping

Working Groups set up by the Committee

 28

Considering the present state of capital markets in India and keeping in view the ongoing
developments in Internet based securities business, it was felt that SEBI as a regulator could strive to
identify areas where use of Internet in the capital market is possible within the existing legal framework.
One such area identified by the Committee, which is also the central within the existing legal framework.
One such area identified by the Committee, which is also the central theme of this report, is the area of
Internet trading on existing electronic exchange. In this area, through early introduction of Cyber Laws
would be highly describe but their existence is not a necessary precondition. To look into the existing
regulatory scenario and to bring out some ground rules for use of the medium of Internet, the Committee
therefore constituted the following two working groups to look into the area of:

i. Security protocols and standardization of interfaces for Interest based securities trading,
chaired by Prof. Deepak B. Phatak, IIT, Pawai, Mumbai
ii. Surveillance and monitoring related issues arising due to Interest based securities trading,
chaired by Shri. L.K. Singhvi, Sr. ED, SEBI

The committee also requested Ms D N Raval, Executive Director, SEBI to examine the legality of
introduction of Internet trading and issue of Alternative trading systems. This report of the standing
committee examines the regulatory and security requirements Internet Based Trading on Conventional
Exchanges. Separate reports (s) will cover the other areas related to Internet applications in the securities
markets.

The report of the first working group on security protocols and standardization of interfaces has since
been submitted and incorporated in the report. The committee would like to place on record its sincere
thanks to Dr. D.B. Phatak, Ms. D.N. Raval and their team members. The global financial market is
undergoing a transformation due to rapid technological developments. It thus becomes imperative that for
developing in effective regulatory framework developments in other parts of the world should be studies
and analyzed.

With nearly who million on-line investors, Internet trading in the United States is growing by leaps and
bounds. Internet trading is being facilitated by large brokerage houses, thus changing the total concept of
securities trading. A team comprising of members from stock exchanges and SEBI visited the United
states to these development and had interactions with brokerages houses, Internet service providers and
other agencies involved in facilitating Internet trading. The team also discussed the developments in the
emerging regulatory and supervisory framework in United States with the Securities and Exchange
 29

Commission officials. They were also tripped of the various initiatives taken by SEC in this regard. These
inputs have been utilized while drafting this report.

Recommendations of the Committee

Application for Permission by Brokers

SEBI registered Stock Brokers interested in providing Internet based trading services will be required to
apply to the respective stock exchange for a formal permission. The stock exchange should grant approval
or reject the application as the case may be, and communicate its decisions to the number within 30
calendar days of the date of completed application submitted to the exchange. The stock exchange, before
giving permission to brokers to start Internet based services shall ensure the fulfillment of the following
minimum conditions.

Net worth Requirement

The broker must have a minimum net worth of Rs. 50 lacs if the broker is providing the Internet based
facility on his own. However, if some brokers collectively approach a service provider for providing the
interest trading facility, net worth, criteria as stipulated by the stock exchange will apply. The net worth
will be computed as per the SEBI circular no FITTC/DC/CIR-1/98 dated June 16, 1998.

Operational and System Requirements:

Operational Integrity:
 30

The stock Exchange must ensure that the system used by the broker has provision for security, reliability
and confidentiality of data through use of encryption technology. This stock exchange must also ensure
that records encryption technology. The stock Exchange must also ensure the records maintained in
electronic from by the broker are not susceptible to manipulation.

System Capacity

The stock Exchange must ensure that the brokers maintain adequate backup systems and data storage
capacity. The stock Exchange must also ensure that the workers have adequate system capacity for
handling data transfer, and arranged for alternative means of communications in case of Internet link
failure.

Qualified Personnel:

The stock Exchange must lay down the minimum qualification fro personnel to ensure that the broker has
suitably qualified and adequate personnel to handle communication including instructions as well as other
back office work which is likely to increase because of higher volumes.

Written Procedures:

Stock Exchange must develop uniform written procedures to handle contingency s

tuations and for review of incoming and outgoing electronic correspondence.

Signature Verification/ Authentication:

It is desirable that participants use authentication technologies. For this purpose is should be mandatory
for participants to use certification agencies as and when notified by Government/SEBI. They should also

clearly specify when manual signatures would be required.

Client Broker Relationship

Know Your Client:

 31

The stock Exchange must ensure that brokers have sufficient, verifiable information about clients, which
would facilitate risk evaluation of clients.

Broker- Client Agreement:

Brokers must enter into an agreement with clients spelling out all obligations and rights. This agreement
should also inter alia, the minimum service standards to be maintained by the broker for such service
specified by SEBI/Exchange for the internet based trading from time to time. Exchange will prepare a
model agreement for this purpose. The broker agreement with clients should not have any clause that is
less stringent/contrary to the conditions stipulated is the model agreement.

Investor Information:

The broker web site providing the internet based trading facility should contain information meant for
investor protection such as rules and regulations affecting client broker relationship arbitration rules,
investor protection rules etc. The broker web site providing the Internet based trading facility should also
provide and display prominently, hyper link to the web site/page on the web site of the relevant stock
exchange (s) displaying rules/ regulations/ circulars. Ticker/quote/order book displayed on the web-site of
the broker should display the time stamp as well as source of such information against the given
information.

Order/Trade Confirmation:

Order/Trade confirmation should also be sent to the investor through email at client’s discretion at the
time specified by the client in addition to the other made of display of such confirmation of real time basis
on the broker web site. The investor should be allowed to specify the time interval on the web site itself
within which he would like to receive this information through email. Facility for reconfirmation of
orders which are larger than that specified by the member's risk management system should be provided
on the internet based system.

Handling Complaints by Investors:

Exchanges should monitor complaints from investors regarding service provided by brokers to ensure a
minimum level of service. Exchange should have separate cell specifically to handle Internet trading
 32

related complaints. It is desirable that exchanges should also have facility for on-line registration of
complaints on their web site.

Risk Management:

Exchanges must ensure that brokers have a system-based control on the trading limits of clients, and
exposures taken by clients. Brokers must set predefined limits on the exposure and turnover of each
client. The broker systems should be capable of assessing the risk of the client as soon as the order comes
in. The client should be informed of acceptance/rejection of the order within a reasonable period. In case
system based control rejects an order because of client having exceeded limits etc., the broker system may
have a review and release facility to allow the order to pass through.

Contract Notes:

Contract notes must be issued to clients as per existing regulations, within 24 hours of the trade

execution.

Cross Trades:

As a matter of abundant precaution, the committee seeks to reiterate that as III the case of existing
system, brokers using Internet based systems for routing client orders will also not be allowed to cross
trades of their clients with each other. All orders must be offered to the market for matching.

It is emphasized that in addition to the requirements mentioned above, all existing obligations of the
broker as per current regulation will continue without changes. Exchanges may also like to specify more
stringent standards as they may deem fit for allowing Internet based trading facilities to their brokers.

Enforcement: A separate working group has been set to look into the surveillance and enforcement
related issues arising due to Internet based securities trading. However, general anti-fraud provisions
(SEBI Fraudulent and Unfair Trade Practices Regulations, 1995) would apply to all transactions
involving securities or financial services, regardless of the medium.

FEATURES OF ONLINE TRADING: The Online Trading is having many features which
make it most suitable for the investors to go for. Some of these features are as follows:
 33

The Internet can provide a new sense of control over your financial future. The amount of investment
information available online is truly astounding. It's one of the best aspects of being a wired investor. For
the first time in history, any individual with an Internet connection can:

• Know the price of any stock at any time

• Review the price history of any stock in chart format
• Follow market events in-depth
• Receive a wealth of free commentary and analysis about stock markets and the global
economy
• Conduct extensive financial research on any company

One of the great appeals of using an online trading account is the fact that the account belongs to you, and
is under your direct control. When you want to buy or sell stock, you no longer need to call your broker
on the phone; hope that he is in the office to place your order; possibly argue with the broker about the
order; and hope that the transaction is executed instantly.

At the most basic level, an online trading account gives you more agility in buying and selling stocks.
This is through sophisticated information streams, dedicated trading platforms and sophisticated tools for
accessing the markets.

Every broker house aims at providing the investor with the best price available. Also due to the high level
of transparency with regard to display of information relating to the specific stocks and company profiles,
you will be able to get the best quote for your orders.

Online trading offers you greater transparency by providing you with an audit trail. This involves a
complete integrated electronic chain starting from order placement, to clearing and settlement and finally
 34

ending with a credit into your depository account. All these stages are subject to inspection, thus bringing
in transparency into the system.

Online trading integrates your bank account, your trading account and your demat accounts, which leads
to easy and paperless trading for you.

You as an Investment online customer will be able to execute the entire trading transaction, right from
logging on to our site, to the execution and settlement of your bank account, in a very short period of
time.

Trading on the net, gives even the smallest retail investor access to information that earlier was available
only to the big traders. This provides a level playing field for all investors in the securities market.

This method of trading reduces the settlement risk for the investor, as in this case all short sell orders are
squared off at the specified cut-off time and not allowed to be carried forward.

In the case of a demat account your demat account is checked by us before executing your sell
transaction. This reduces the settlement risk for the buyer, who is assured of the delivery of the securities
and for you as a seller of the securities

Every trade is confirmed immediately and you will receive an on-screen confirmation following every
trade with full details for your records. This avoids costly errors that would have been discovered when it
is too late.

Your Bank, Depository and online account are integrated for your convenience. Various broking houses
provide access to many of the popular banks.
 35

Broking houses work hard to keep our account and personal information secure. From updated security
technology to advanced fraud prevention measures, they have the people and tools in place to provide a
strong defense against electronic scams and fraud.

BENEFITS OF ONLINE BROKING

1) Less Costly:

The most significant advantage of the Online broking is the cost reduction in the brokerage. Due to the
power of the Internet one has the privilege of becoming the clients of really large brokerages with the
benefits of enjoying the low charges hithelio before enjoyed only by the big players. As the DP account
has got linked to the trading account most players do not charge a minimum transaction cost thus truly
 36

allowing one to buy a single share and achieve meaningful rupee price averaging whatever be your
buying power.

2) Peace of Mind:

One can never have complete peace of mind but online investing does away with the hassles of filling up
instruction slips, visits to the broker for handing over these slips and consequent costs.

3) Keeping Records:

The site one trades on keeps a record of all transactions down to unexecuted orders and cancelled orders
thus keeping one abreast of all your transactions 24 hours a day. No paperwork means more time at one’s
disposal for research and analysis.

4) Access to Information and investment Tools:

Most online investing sites have a wealth of information for their registered members. This includes
research reports, results, analysis and even gossip and the buzz in the market.

5.) Unparalleled Liquidity:

The. bank account linked with the trading account invariably has an A TM free. Most partner banks offer
Internet banking as well. This results in one’s money becoming available to him whenever he like from
his trading account. Conversely in case he spot an opportunity in the market he can immediately allocate

money from his savings account to his trading account and make profits.

6.) Unparalleled Safety:

Most sites are secure using 128-bit algorithms -highest available commercially anywhere in the world.
Moreover even if somebody broke in and tampered with one’s account the money from the stocks he sold
or the stock bought from the money in his account is in his account only.

7.) Reduces the settlement risk:

 37

This method of trading reduces the settlement risk for the investor, as in this case no Short sale is possible
i.e. the seller will not be able to sell the securities unless he has their actual possession. In the case of a
demat account (required for an online transaction), when a seller wants to sell the securities, his demat
account is checked by the Depository Participant before executing the sale transaction. This reduces the
settlement risk for the buyer, who is assured of the delivery of the securities.

8.) Offers greater transparency:

Online trading gives greater transparency to the investors by providing them an audit trail. This involves a
complete integrated electronic chain starting from order placement, to clearing and settlement and finally
ending with a credit to the depository account of the investor. All these stages are subject to inspection,
thus bringing in transparency into the system.

9.) Ease of trade:

It is the ease of doing the trade through net, with a click of mouse, one can buy or sell any share that is
dematerialized.

Other than the above-mentioned advantages, Internet trading provides some additional advantages to the
investors, brokers and also helps the nation to channelize the resources. Net trading would increase
competition in the market hence increase in the bargaining power of the investors. The entire

communication between the investor, broker and exchange would take place within milliseconds.
 38

PROBLEMS OF ONLINE BROKING

There is a flip side to everything and online trading is no exception.

 39

4%
14% 21%

More Costly
Lack Of Know ledge
11% Loyalty to Traditional Broker
Lack of Trust
Slow Speed
23%
Other

27%

Chart

Source:- www.lse.co.in

27% Loyality is of traditional broker

23% people says that online trading is more costly than manual trading.

21% people not prefer online trading because of lack of knowledge.

So, the main problems of online trading are as follows:

1.) "Server not found":

This may appear on one’s screens when he is desperately trying to get out of an unprofitable position.
Some of the online sites are providing a telephone number for use in case their sites are overloaded or
their server down.

2.) Connectivity of the Broker with NSE:

Recently ICICI Direct had a connectivity problem with the NSE for two and halfhours during trading
hours. This problem is rare but be alive to its possibility.

3.) Cyber attack:

 40

In the event of a malicious attack on the systems of one’s broker he is protected only if the company is
taking proper precautions against such attacks and if proper backup is regularly been taken. He may like
to choose a brokerage that has a stated security policy and contingency plan in place.

4.) Non-availability of a seamless interface:

As a client one will access the NSE through a server of the online brokerage and this may involve
queuing delays. If a number of client access the server the server takes its own time sending the orders to
the NSE server. He must check out the seamlessness of this interface before selecting an online
brokerage. The faster the orders are processed the more seamless is the interface.

5.) Non- availability of personalized advice:

If one like to ask his broker "Aaj kya achcha lag raha hai" he may not be able to do so. If he want advice
on a particular stock in his portfolio he may not even be able to get that.

6.) Margin:

If Internet trading alone is not fast and furious enough; many people are trading on margin. That is where
the brokerage firm lends you money by leveraging his account, allowing him to buy a large amount of
securities by putting up only a small amount of money. He may have forgotten what he read in the small
print of his agreement, but the brokerage firm has the right to change the maintenance margin
requirements without any warning or notice to him. In fact, the firm has the right to liquidate his
securities holdings (and it can pick and choose which ones) without any notice to one if he fail to meet the
margin call. And there he was leveraged to the hilt, hoping to hit a home run when he discovered that he
is required to make a large deposit that he cannot make. The next thing one know, the firm is selling off
his securities at a point in time that is not the best for him. These are the perils of trading on margin.

7.) Little use of advisory services:

The advisory services being promised by the brokers would be of little use to investors looking for an
insight into the market. Many would not like to rely on research reports, which are there for all. So, net
investors will have to do their own research and take their own decision, whether wild or wise.

8.) Increased charges:

 41

Some of the brokers are of the view that they would have to provide advisory services to the customers.
But with increased volumes, they will have to follow the international practice of charging a little more
than the normal charges from a customer looking for personal advice.

WHY PEOPLE ARE BENDING TOWARDS ONLINE TRADING

 42

Several broking houses now offer online trading facilities. You can trade online with e-brokerages such as
ICICI Direct, Kotakstreet, India bulls, India info line’s 5paisa.com and HDFC securities.

If you are already comfortable trading with your regular broker, here are few reasons why you may
consider switching to trading online, or at least another avenue of trading. an obvious advantage of online
trading is that your transaction would be virtually paperless. Your trading account would be linked to
your demat and bank account, ensuring a smooth transaction process. This is especially helpful in the
extent T+2 settlement system, where you have just two days to settle your transaction.

The normal process of issuing of delivery note, in case of a sale, or arranging for a payment in case of
purchaser of shares, is all taken care of the minute your order is executed online. The absence of manual
intervention ensures that you are completely in control of all transaction.

There is also little room for error, as your order is always confirmed before it is executed. You can also
make better decision as you have a clear record of all your previous transaction. When you trade offline, a
demat statement is normally sent to you only on a quarterly basis .keeping track of your portfolio can be a
hassle in such a case. The inter net can provide a new sense of control over your financial future. The
amount of investment information available online is truly astounding. Its one of the best aspect of being
a wired investor for the first time in history, any individual with an internet connection can:

• Know the price of any stock at any time

• Review the price history of any stock in chart format
• Follow market events in-depth
• Receive a wealth of free commentary and analysis about stock markets and globe economy.
• Conduct extensive financial research on any company
• Talk with other investors around the world

At investsmart you can get real-time stock quotes, daily roundups of the stock market, experts
commentary, and a deep community of fellow investors.

Convenience is probably the greatest advantage online trading offers investors. if don’t have time to trade
during market hours ,perhaps you are at work, you can log on the web-trading site and place your order
offline, during off market hours. Your order would join the queue and be expected the next day. You
would need to enjoy a good relationship with your broker, for you to be able to reach him in the late
 43

hours. For non-resident Indians (NRI), trading online is perhaps their easiest option to invest in the Indian
stock markets.

What is more, the time difference, in some cases, can work to their advantage .Antony, an NRI-based in
New York, places his order in the evening after work, when it is day time India and the markets are open.
We also have access to considerable information online. By just logging on to ICICI direct online, for
instance, we can get the latest news, market information and company research.

Moreover, if our connection is maddeningly slow and we want to get your order executed immediately,
most e-brokerages also provide a facility to trade offline by placing our order via the phone.

PROCESS OF ONLINE TRADING

An investor interesting in trading through Internet shall have to, firstly register himself with an Internet
brokerage firm. Some formalities such as filling the account opening form of the e-broker, copies of
identity proof, copy of residence proof are made to register himself with the e-trader. Secondly, the
 44

investor would be required to open a bank account with a scheduled bank and sufficient balance should be
kept in the account. Thirdly he would be required to open account with a depository participant because
only dematerialized shares can be traded on Internet.

The client places order via the net by logging on to his

Broker’s site.

The broker accepts and executes the order and

places it with the exchange

The exchange accepts the order after checking the share

limit for the day.

The broker makes the payment either directly via the client
bank account or pays through its own account and recovers
it later from the client.

The exchange receives money and completes the

settlement.

The client is intimated about the settlement

either through the demat or via e-mail.

So, generally following steps are followed while doing the trading through the Internet:

Step-I:

Those investors interested in doing the trading over Internet system, that is,NEAT - ISX (NSE), should
approach the brokers and register with the Stock Broker.
 45

Step-2:

After registration, the broker will provide to them a login name, password and a personal identification
number (PIN).

Step-3:

Actual placement of an order, Using the place order window as under can then place an order:

(a) First by entering the symbol and series of stock and other parameters such as quantity and price of the
scrip on the place order window.

(b) Second, fill in the symbol, series and the default quantity.

Step-4:

It is the process of review. Thus, the investor has to review the order placed by clicking the review option.
He may also re-set to clear the values.

Step-5:

After the review has been satisfactory; the order has to be sent by clicking on the send option.

Step-6:

The investor will receive an "Order Confirmation" 'message along with the order number and the value of
the order.

Step- 7:

In case the order is rejected by the Broker or the Stock Exchange for certain reasons such as invalid price
limit, an appropriate message will appear at the bottom of the screen. At present, a time lag of about ten
seconds is there in executing the trade.

Step-8:

It is regarding charging payment, for which there are different modes. Some brokers will take some
advance payment from the, investors and will fix their trading limits. When the trade is executed, the
broker will ask the investor for transfer of funds by the investor to his account.
 46

CLIENT BROKER STOCK EXCHANGE

Accepts the Accepts the order

Places an order on order, Checks after checking the
the net on the the client’s scrip limit of the
broker’s website Identity and broker for the day
through the places the
distinctive I.D. order with the
code stock Executes the
THE MECHANICS
exchangeOF ONLINE TRADING
order
The settlement of
the deal (buy/sell
order) gets
reflected in his
Demat account.
Pays the

Exchange
The client is
though his
intimated about Receives the
owns account
the execution of money and
and receives it
the deal by e-mail. completes the
from the client
Pays the broker settlement
account.
 delivery.

47

Rolling Settlement Cycle :

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 and BSE, 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/BSE 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.
 48

Concept Of Buying Limit

Suppose you have sold some shares on NSE and are trying to figure out that if you can use the
money to buy shares on NSE in a different settlement cycle or say on BSE. To simplify things
for ICICI Direct customers, we have introduced the concept of Buying Limit (BL). Buying Limit
simply tells the customer what is his limit for a given settlement for the desired exchange.
Assume that you have enrolled for a ICICI Direct account, which requires 100% of the money
required to fund the purchase, be available. Suppose you have Rs 1,00,000 in your Bank A/C and
you set aside Rs 50,000 for which you would like to make some purchase. Your Buying Limit is
Rs 50,000. Assume that you sell shares worth Rs 1,00,000 on the NSE on Monday. The BL
therefore for the NSE at that point of time goes upto Rs 1,50,000. This means you can buy shares
upto Rs 1,50,000 on NSE or BSE. If you buy shares worth Rs 75,000 on Tuesday on NSE your
BL will naturally reduce to Rs75,000. Hence your BL is simply the amount set aside by you
from your bank account and the amount realized from the sale of any shares you have made less
any purchases you have made. Your BL of Rs 50,000, which is the amount set aside by you
from your Bank account for purchase is available for BSE and NSE. As you have made the sale
of shares on NSE for Rs.100000, the BL for NSE & BSE rises to 1,50,000. The amount from
sale of shares in NSE will also be available for purchase on BSE. ICICI Direct

Future Agenda:

Under the existing legal and regulatory framework, SEBI registered brokers can offer trading on Internet
through order is routing systems. However, with the rapid development of the technology, we have to
evolve fisher steps in this direction it is therefore proposed that as the next step link between the
depositories and banks shall be established after the necessary regulations have been passed. This would
reduce the clearing and settlement time and would also minimize the risk of all the participants involved
 49

in the transactions. We have to look forward towards achieving an ideal scenario where all the services
related to securities markets including marketing of initial public offers on internet, providing investment
advisory services to the clients, broking, clearing and settlement etc., are provided on the Internet by an
intermediary. In a nutshell it can be said that we are moving towards a one-stop service center.
 50

RESEARCH METHODOLOGY

The basic task of research is to generate accurate information for use in decision

making. Research can be defined as the systematic and objective process of gathering, recording

and analyzing data for aid in making business decisions.

There are basically two techniques adopted for obtaining information:

1. Primary Data.

2. Secondary Data.

Primary Data is gathered specifically for the project at hand through personal interviews

with the accounts officers.

Secondary data is previously collected and assembled for some project other than the one

at hand. It is gathered and recorded by someone else prior to current needs of the researcher. It is

less expensive than the primary data.

SECONDARY DATA

Secondary data was collected from Ludhiana Stock Exchange

 51

Scope of study:

The study is limited to Ludhiana Stock Exchange , Firoz Gandhi Market Ludhiana

Data Collection:

Data is collected from secondary sources.

Sources of data collection are:

1) Ludhiana Stock Exchange

2) www.nseindia.com

3) www.bseindia.com

4) www.on-linetrading.com

For the successful research the manipulation of certain things, concepts, and
symbols for the purpose of generalization is inevitable. Research is simply the pursuit of truth
with the help of the study.