Order Routing and Order Matching in stock markets

Order Routing:

Once the order is entered and confirmed by the investor at his trading terminal and verified by the broker software the order is routed to the exchange for its execution.

The order gets executed at the exchange depending upon the type of order. If the order is a market order it gets executed immediately. If it is a limit order it is stored in the order book and matched against the other limit orders. Once the order is matched a trade is said to be executed. As soon as a trade is executed the trade confirmation message will be informed to the brokerage firm which in turn informs the investor through a message on the trading terminal.

Order Modification/Cancellation:
All orders can be modified or cancelled during the trading hours provided they are not fully executed. For the orders, which are partially traded, only the open or unexecuted part of the order can be cancelled.

Order Matching:
We will examine how the order matching works in detail.

The order matching in an exchange is done based on price-time priority. The best price orders are matched first. If more than one order arrives at the same price they are arranged in ascending time order. Best buy price is the highest buy price amongst all orders and similarly best sell price is the lowest price of all sell orders.

Let’s take an example. Read more

August 3, 2008 | Filed Under Stocks | Leave a Comment

Functions of Custodian and Depository

Custodian:
A custodian is an entity which holds the documentary evidence of the title to property belonging like share certificates, etc for safekeeping. In Clearing Corporation, custodian is a clearing member but not a trading member. He settles trades assigned to him by trading members. He is required to confirm whether he is going to settle a particular trade or not. If it is confirmed, the Clearing Corporation assigns that obligation to that custodian and the custodian is required to settle it on the settlement day. If the custodian rejects (if there are mismatches due to errors in the system) the trade, the obligation is assigned back to the trading member. Only on receipt of the rejection message, the broker shall cancel the rejected contract note and issue a fresh contract note bearing a new number.

Depository:
A depository is an entity where the securities of an investor are held in electronic form.Depositories help in the settlement of the dematerialized securities. Each custodian/clearing member is required to maintain a clearing pool account with the depository. He is required to make available the required securities in the designated account on settlement day.

The depository runs an electronic file to transfer the securities from accounts of the custodians/clearing member to that of Clearing Corporation. As per the schedule of allocation of securities determined by the Clearing Corporation, the depositories transfer the securities on the payout day from the account of the Clearing Corporation to those of members/custodians.

Every investor who wants to hold securities in dematerialized form must open an account with a depository participant (DP) of his choice. Usually this is done by your broker on behalf of you. Depository Participants (DPs) hold accounts with depositories. Read more

August 3, 2008 | Filed Under Stocks | Leave a Comment

Functions of Clearing Banks

Clearing Bank acts as an important intermediary between clearing member and clearing corporation. Every clearing member needs to maintain an account with clearing bank. It’s the clearing member’s function to make sure that the funds are available in his account with clearing bank on the day of pay-in to meet the obligations. In case of a pay-out clearing member receives the amount on pay-out day.

The following banks are providing clearing bank services at BSE

Bank of India
HDFC Bank Ltd.
Oriental Bank of Commerce
Standard Chartered Bank
Centurion Bank Ltd
Axis Bank Ltd
ICICI Bank Ltd
Indusind Bank Ltd
Union Bank of India and
Hongkong & Shanghai Banking Corporation Ltd

The following banks are offering clearing bank services at NSE Read more

August 3, 2008 | Filed Under Stocks | Leave a Comment

Trade Clearing and Settlement in Stock Markets

Clearing and settlement is a post trade activity.

Clearing Agencies ensure trading members meet their fund/security obligations. It acts as a legal counter party to all trades and guarantees settlement for all members. The original trade between the two parties is cancelled and clearing corporation acts as counter party to both the parties, thus manages risk and guarantees settlement to both the parties. This process is called novation.

It determines fund/security obligations and arranges for pay-in of the same. It collects and maintains margins, processes for shortages in funds and securities. It takes help of clearing members, clearing banks, custodians and depositories to settle the trades.

The settlement cycle in India is T+2 days i.e. Trade + 2 days. T+2 means the transactions done on the Trade day, will be settled by exchange of money and securities on the second business day (excluding Saturday, Sundays, Bank and Exchange Trading Holidays). Pay-in and Pay-out for securities settlement is done on a T+2 basis.

The following is the summary of trading and settlement process in India. Read more