Trading System & Procedures

BSE, the oldest Stock Exchange of Asia,, had an open outcry trading system till March 1995 where member-brokers used to assemble in a trading ring for doing transactions in securities. It had switched over to a fully automated computerized mode of trading known as BOLT (BSE on Line Trading) System w.e.f. March 14, 1995. Through the BOLT system, the member-brokers now enter orders for purchase or sell of securities from Trader Work Stations (TWSs) installed in their offices instead of assembling in the trading ring. This system, which was initially both order and quote driven, is currently only order driven. The facility of placing of quotes has been discontinued w.e.f., August 13, 2001 in view of lack of market interest and to improve system-matching efficiency. The system, which is now only order driven, facilitates more efficient in-putting, processing, automatic matching and faster execution of orders in a transparent manner.

The trading in securities at the Exchange is conducted in an anonymous environment and the counterparty identity is not revealed. The buyers and sellers of securities do not know the names of each other.

The member-brokers of the Exchange were permitted to open trading terminals only within the city limits of Mumbai till 1996. The Exchange obtained permission from SEBI for expansion of its BOLT network to locations outside Mumbai. The expansion of BOLT network to cities outside Mumbai was extended on August 31, 1997. The Exchange was initially allowed by SEBI to set up trading terminals in all places except in the jurisdictional areas of other Regional Stock Exchanges.. However, since the end of the year 1999, the member-brokers of the Exchange are now permitted by SEBI to install their trading terminals at any place in the country including in the jurisdictional areas of other Regional Stock Exchanges. The Exchange has admitted subsidiary companies formed by 15 Regional Stock Exchanges as its member-brokers as on June 30, 2003. The member-brokers of these Regional Stock Exchanges work as sub-brokers of the member-brokers of the Exchange.

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', 'F' and 'Z' groups which represent the Equity Segment. As on June 30, 2003 there were 198, 790, 1830 and 2776 scrips in these four groups respectively.

The Exchange has for the guidance and benefit of investors classified the scrips in the Equity Segment in A', 'B1', & 'B2' based on certain qualitative and quantitative parameters which include number of trades, value traded, etc. for the guidance and benefit of investors. The 'F' group represents the fixed income securities wherein 730 securities were listed as on June 30, 2003. The Exchange has commenced trading in Govt. Securities for retail investors under "G" group w.e.f. January 16, 2003 and 85 Govt. Securities are traded on the Exchange under this group as on June 30, 2003.

The 'Z' group was introduced by the Exchange in July 1999 and includes the companies which have failed to comply with the listing requirements of the Exchange and/or have failed to resolve investor complaints or have not made the required arrangements with both the Depositories, viz., Central Depository Services (I) Ltd. (CDSL) and National Securities Depository Ltd. (NSDL) for dematerialization of their securities. Companies in "Z" group numbered 2776 as on June 30, 2003.

The Exchange also provides a facility to the market participants of on-line trading in "C" group which covers the odd lot securities in 'A', 'B1', 'B2' and 'Z' groups and Rights renunciations in all the groups of Scrips in the equity segment and Rights renunciations in all the groups of scrips in the Equity Segment.

The scrips of the companies which are in demat can be traded in market lot of one but the securities of companies which are still in the physical form are traded on the Exchange in the market lot of generally either 50 or 100. However, the investors having quantities of securities less than the market lot are required to sell them as "Odd Lots". The facility of trading in odd lots of securities not only offers an exit route to investors to dispose of their odd lots of securities but also provides them an opportunity to consolidate their securities into market lots.

The 'C' group facility can also be used by investors for selling upto 500 shares in physical form in respect of Scrips of companies where trades are to be compulsorily settled by all investors in demat mode. This scheme of selling physical shares in compulsory demat Scrips is called an Exit Route Scheme.

With effect from December 31, 2001, trading in all securities listed in equity segment of the Exchange takes place in one market segment, viz., Compulsory Rolling Settlement Segment.

Listed Securities

The securities of companies which have signed Listing Agreement with the Exchange are traded at the Exchange as "Listed Securities". Baring a few scrips, all scrips traded in the Equity Segment at the Exchange fall in this category.

Permitted Securities

To facilitate the market participants to trade in securities of the companies which are actively traded at other Regional Stock Exchanges but are not listed on the Exchange, the Exchange has in April 2002 decided to permit trading in such securities as " Permitted Securities" provided they meet the relevant norms specified by the Exchange. Accordingly, the Exchange has permitted trading in scrips of 13 companies in this category, as on June 30, 2003.

Tick Size:

Tick size is the minimum difference in rates between two orders entered on the system for a particular scrip. Trading in scrips listed on the Exchange is done with the tick size of 5 paise. However, in order to increase the liquidity and enable the market participants to put orders at finer rates, the Exchange has reduced the tick size from 5 paise to 1 paise in case of units of mutual funds, securities traded in "F" group and equity shares having closing price upto Rs. 15/- on the last trading day of the calendar month. Accordingly, the tick size in various scrips quoting upto Rs.15/- is revised to 1 paise on the first trading day of month. The tick size so revised on the first trading day of month remain unchanged during the month even if the prices of scrips undergo change.

Computation of closing price of scrips in the Cash Segment:

The closing price of scrips is computed by the Exchange on the basis of weighted average price of all trades executed during the last 15 minutes of the continuous trading session. However, if there is no trade recorded during the last 15 minutes, then the last traded price of a scrip in the continuous trading session is taken as the official closing price.

Compulsory Rolling Settlement (CRS) Segment

In order to bring about settlement efficiency and reduce settlement risk, the Group of 30 (commonly known as G-30) had recommended in 1989 that all secondary market across the globe should adopt a rolling Settlement cycle on T+3 basis by 1992, i.e., the trades should be settled by delivery of securities and payment of monies on third business days after the trade day.

With a view to implement the above recommendations, introduce the best international practices and to achieve higher settlement efficiency, trades in all the equity shares listed on the Exchange in CRS Segment, as mandated by SEBI, were required to be settled initially on T+5 basis w.e.f. December 31, 2001. As per the directive by SEBI, all transactions in all groups of securities in the Equity Segment and Fixed Income securities listed on the Exchange were required to be settled on T+3 basis w.e.f. April 1, 2002. Further, as per the mandate received from SEBI, the Exchange has since introduced the settlements for all groups of securities in the Equity Segment, "F" & "G" groups on T+2 basis w.e.f. from April 1, 2003.

Under a rolling settlement environment, the trades done on a particular day are settled after a given number of business days rather than settling all trades done during an 'account period' of a week or fortnight. A T+3 settlement cycle means that the final settlement of transactions done on T, i.e., trade day by exchange of monies and securities between the buyers and sellers respectively occurs on third business day after the trade day.

The transactions in securities of companies which have made arrangements for dematerialization of their securities are settled only in demat mode on T+2 on net basis, i.e., buy and sell positions of a member-broker in the same scrip are netted and the net quantity and value is required to be settled. However, transactions in securities of companies, which are in "Z" group or have been placed under "trade to trade" by the Exchange as a surveillance measure, are settled only on a gross basis and the facility of netting of buy and sell transactions in such scrips is not available. For example, if a member-broker buys and sells 100 shares of a company on the same day which is in "Z" group or on "trade to trade" basis, the two positions are not netted and the member-broker has to first deliver 100 shares at the time of pay-in of securities and then receive 100 shares at the time of pay-out of securities on the same day. Thus, if one fails to deliver the securities sold at the time of pay-in, it is treated as a shortage and the relevant quantity is auctioned/ closed-out by the Exchange.

The transactions in 'F' group securities representing Fixed Income Securities are also settled at the Exchange on T+3 basis.

DAY ACTIVITY - Trading on BOLT

Downloading of provisional securities and funds obligation statements by member-brokers.

6A/7A* entry by the member-brokers/ confirmation by the custodians.- * 6A/7A : A mechanism whereby the obligation of settling the transactions done by a member-broker on behalf of a client is passed on to a custodian based on confirmation of latter. The custodian can confirm the trades done by the member-brokers on-line and upto 11 a.m. on the next trading day. The late confirmation of transactions by the custodian after 11:00 a.m. upto 12:15 p.m., on the next trading day is, however, permitted subject to payment of charges for late confirmation @ 0.01% of the value of trades confirmed or Rs. 10,000/-, whichever is less.

• T+1 - Confirmation of 6A/7A data by the Custodians upto 11:00 a.m. Downloading of final securities and funds obligation statements by member-brokers.

• T+2 - Pay-in of funds and securities by 11:00 a.m. and pay-out of funds and securities by 1:30 p.m. The member-brokers are required to submit the pay-in instructions for funds and securities to banks and depositories respectively by 10: 30 a.m.

• T+3 - Auction on BOLT at 11.00 a.m.

• T+4 - Auction pay-in and pay-out of funds and securities by 12:00 noon and 1:30 p.m. respectively.

Thus, the pay-in and pay-out of funds and securities takes places on the second business day (i.e., excluding Saturday, Sundays and bank & Exchange trading holidays) of the day of the execution of the trade.

The settlement of the trades (money and securities) done by a member-broker on his own account or on behalf of his individual, corporate or institutional clients may be either through the member-broker himself or through a SEBI registered custodian appointed by him/client. In case the delivery/payment in respect of a transaction executed by a member-broker is to be given or taken by a registered custodian, then the latter has to confirm the trade done by a member-broker on the BOLT System through 6A-7A entry. For this purpose, the custodians have been given connectivity to BOLT System and have also been admitted as clearing member of the Clearing House. In case a transaction done by a member-broker is not confirmed by a registered custodian within the time permitted, the liability for pay-in of funds or securities in respect of the same devolves on the concerned member-broker.

The introduction of settlement on T+2 basis, as discussed above, has considerably reduced the settlement risk, ensured early receipt of securities and monies by the buyers and sellers respectively and has brought the Indian capital market on par with the internationally accepted standard of settlements.

A descriptive narrative on settlement procedure is given in the next article.