SECONDARY MARKETS

SECONDARY MARKETS (Part 1)

• Definition: The secondary market is where securities once issued are bought and sold between investors.
• Role and Function: The secondary market provides liquidity, enables price discovery, serves as a means of information-signaling, and acts as a barometer of economic activity.
• Key Characteristics:
  • Liquidity: Allows investors to buy and sell securities at a low cost and in a short span of time.
  • Price Discovery: Enables the determination of market prices of traded securities based on individual assessments of investors.
  • Information Signaling: Provides instant information about issuing companies to all market participants, forcing issuers to improve profitability and performance.
  • Barometer of Economic Activity: Secondary market trading data is used to generate benchmark indices that track the overall market direction and indicate economic performance.
• Types of Secondary Markets:
  • Secondary Market for Equities: Provided by stock exchanges, which are regulated by SEBI and offer a platform for trading of equity shares.
  • Secondary Market for Debt Securities: Classified into the government securities (G-sec) market, regulated by the RBI, and the corporate bond market, regulated by SEBI.
  • Secondary Market for Commodities: The spot market for commodities is regulated by individual state governments, with Agricultural Produce Market Committees (APMC) set up to oversee the trade.

SECONDARY MARKETS (Part 2)

• Introduction: The secondary market consists of various participants, including stock exchanges, clearing corporations, investors, issuers, financial intermediaries, and regulators.
• Objectives: The objective of the secondary market is to provide a platform for buying and selling securities, ensuring transparency, efficiency, and fairness.

Key Concept 1: Market Structure and Participants

• Definition: The secondary market consists of the following participants:
  • Stock exchanges: entities that provide infrastructure for trading in securities
  • Clearing corporations: entities that provide clearing and settlement guarantees in trading
  • Investors: individuals and institutions that buy and sell securities
  • Issuers: companies and governments that issue securities
  • Financial intermediaries: firms that facilitate secondary market activity
  • Regulator: authority that oversees activities of all participants in the market

Key Concept 2: Stock Exchange

• Definition: A stock exchange is a platform that enables investors to buy and sell securities from each other in an organized and regulated manner.
• Details: Stock exchanges stipulate rules for members who are permitted to transact on the exchange, and for listing companies whose securities are permitted to be traded.
• Examples: The three national-level stock exchanges in India are the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE), and the Metropolitan Stock Exchange of India Ltd (MSEI).

Key Concept 3: Investors

• Definition: Investors are individuals and institutions that buy and sell securities in the secondary market.
• Details: Investors can trade in the secondary markets only through members of a stock exchange, who are also called stock brokers.
• Requirements: Investors must complete a Know Your Customer (KYC) process with a registered broker-member and receive a unique client code (UCC).

Key Concept 4: Issuers

• Definition: Issuers are companies and governments that issue securities that are listed on the stock exchange.
• Details: Issuers must pay a listing fee and comply with requirements for disclosure of information that may have a bearing on the trading prices of the listed securities.

Key Concept 5: Intermediaries involved in Trading, Clearing and Settlement

• Definition: Intermediaries are entities that facilitate trading, clearing, and settlement of securities transactions.
• Details: Intermediaries include clearing corporations, depositories, depository participants, custodians, and clearing banks.
• Examples: National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL) are the two depositories in India.

Key Concept 6: Regulator

• Definition: The regulator is the authority that oversees activities of all participants in the secondary market.
• Details: The Securities and Exchange Board of India (SEBI) is the primary regulator of the secondary market in India.
• Functions: SEBI's primary function is to safeguard the interests of investors and develop and regulate the securities markets.

SECONDARY MARKETS

• Definition: Secondary markets refer to the markets where securities are traded after they have been issued in the primary market.
• Details: This section covers commodities derivatives and all exchange-traded products that are available for trading in foreign stock exchanges which are compliant with IOSCO and FATF regulations.

Key Concepts in Secondary Markets

• Indian International Bullion Exchange (IIBX): Deals in bullion spot trading and bullion depository receipts in the IFSC.
• Nifty Derivatives: Previously traded on the Singapore Exchange (SGX), now traded exclusively on the NSE IX.
• Market Infrastructure Institutions (MIIs): Include stock exchanges, clearing corporations, and depositories, which are subject to SEBI regulations.

Regulatory Framework for MIIs

• SEBI Guidelines: Issued procedural norms on recognition, ownership, and governance for stock exchanges and clearing corporations.
• Gandhi Committee Recommendations: Include widely held ownership of MIIs, rigorous performance review for Managing Directors, and transparency in disclosure of compensation paid to Key Management Personnel (KMP).

Brokers and Client Acquisition

• Broker: A member of a recognized stock exchange who is registered with SEBI and permitted to trade on the screen-based trading system of stock exchanges.
• Authorized Person (AP): An agent of the broker, registered with the respective stock exchanges.
• Client Acquisition Process: Involves completing KYC formalities, in-person verification, and issuing documents such as the Uniform Risk Disclosure Document and Guidance Note.

3-in-1 Account

• Definition: A single account that links savings bank, demat, and trading accounts.
• Advantages: Reduces manual paperwork, enables seamless online transactions, and provides efficient trading.
• Features: Includes a log-in and password, and does not enable operating the underlying bank account or demat account for any other purposes than settling trades completed on the trading account.

Power of Attorney

• Definition: A voluntary delegation of power by the investor to a broker or depository participant to facilitate the delivery and receipt of shares and funds.
• SEBI Guidelines: Issued detailed guidelines for execution of PoA with regard to trading accounts, including the requirement for automatic debit from the client's bank account upon purchase of shares and automatic debit from the client's demat account upon sale of shares.

SECONDARY MARKETS (Part 4)

• Demat Debit and Pledge Instruction (DDPI): A system introduced by SEBI to mitigate the risk of misuse of Power of Attorney (PoA) by brokers, allowing clients to authorize their brokers to access their beneficial owner account for limited purposes.
• Trade Execution: The process of buying or selling shares in the stock market, which can be done through electronic trading platforms, online systems, or mobile trading applications.
• Trading Systems: Stock exchanges offer two types of trading systems: open outcry and online trading, with online systems being the dominant mode of trading in India.

Key Concepts in Trading

• Algorithmic Trading: A broad concept that refers to trading with a computer program that places buy and sell orders based on predefined rules and conditions.
• High-Frequency Trading (HFT): A subset of algorithmic trading that involves automated trading used mainly by large investment banks, hedge funds, and sophisticated institutional investors.
• Co-location: A facility provided by stock exchanges to their brokers to locate their computer servers at the premises where the exchange's own computer servers are located, reducing latency and improving trading speed.

Order Types

• Limit Order: An order that specifies the price at which a trade should be executed, and is placed when an investor wants a trade to get executed only if the desired price becomes available in the market.
• Market Order: An order that is placed when the investor is willing to accept whatever the current price in the market is and wants to ensure that the stocks are either bought or sold immediately.
• Immediate or Cancel (IOC) Order: An order that 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.
• Stop-Loss Order: An order that is placed along with an order to buy or sell, and is triggered when the price moves in the direction opposite to what was desired, to limit potential losses.

Trade Execution Sequence

• Placing of an Order: The investor places an order to buy or sell a specific quantity of shares with the broker.
• Routing of Order: The broker routes the order to the trading system.
• Display of Order: The order is displayed on the trading screen.
• Matching of Order: The order is matched electronically with a corresponding buy or sell order.
• Confirmation of Trade: The trade is confirmed, and a contract note is generated.

SECONDARY MARKETS (Part 5)

• Stop-Loss Orders: A stop-loss order is a limit order that closes a position and limits the loss when the price reaches a certain level. It is kept in a separate book until triggered and is cancelled at the end of the trading day if not executed.
• Disclosed Quantity Order: A large investor may not want to disclose their total order quantity to avoid affecting the market price. They can specify a disclosed quantity, and the broker will disclose the quantity in phases.
• Day Orders and GTC Orders: A day order is valid only until the end of the trading day, while a Good Till Cancelled (GTC) order remains in the system until executed. However, Indian exchanges do not permit GTC orders, and all pending orders are cancelled at the end of the trading day.
• Modification of Orders: Orders can be modified or cancelled until they are matched. Brokers can modify or cancel orders according to client instructions.
• Electronic Trading and Order Execution: Trading on stock exchanges takes place from Monday to Friday, from 9:15 am to 3:30 pm. The pre-open session determines the opening price of a security and reduces the rush of orders at the start of the regular session.
• Key Features of Electronic Trading System:
  • Order-driven system with no intermediaries
  • Transparent with all bid and ask prices visible on the screen
  • Anonymous trading with no revelation of investor identity
  • Price-time priority for matching orders
• Active and Passive Orders: Active orders are executed immediately at the prevailing market price, while passive orders are limit orders that lie unmatched in the order book. Passive orders add to market liquidity, while active orders drain liquidity.
• Direct Market Access (DMA): SEBI permits brokers to allow DMA to institutional clients, which connects their orders directly to the exchange's order book, reducing latency and improving order execution.
• Block Deals and Bulk Deals: A bulk deal exceeds 0.50% of the total equity shares of a company, while a block deal is a large trade executed through a single transaction in a special trading window. Bulk deals are visible to all market participants, while block deals are negotiated outside the exchange and executed on the exchange platform.

SECONDARY MARKETS (Part 6)

• Block Deals: Large trades that are executed in a special trading window to maintain confidentiality. The minimum order size for a block deal is Rs. 25 crores.
• Block Deal Trading Windows: Two special trading windows are provided by exchanges for block deals:
  • Morning window: 8:45 am to 9:00 am
  • Afternoon window: 2:05 pm to 2:20 pm
• Reference Price: The previous day's closing price is the reference price for the morning window, while the volume-weighted average price of trades executed in the stock from 1:45 pm to 2:00 pm is the reference price for the afternoon window.
• Price Limit: The difference between the order price for a block deal and the reference price should not be more than +/(-) 3 percent.

Circuit Breakers

• Definition: A pre-determined value in percentage terms that triggers an automatic halt in trading when there is a rapid movement in an index or security.
• Price Bands: Daily price bands for individual stocks are fixed at 2 percent, 5 percent, 10 percent, or 20 percent, depending on factors such as liquidity, volatility, and trading activity.
• Market-wide Circuit Breakers: Triggered by movements in the specified index (either way) that are seen as too volatile by exchange authorities.

Contract Note

• Definition: A confirmation of trades in equity shares completed on a particular day for and on behalf of a client.
• Requirements: A contract note should be signed by the authorized signatory of the trading member, be in the prescribed format, and contain details of the trade, settlement, brokerage, securities transaction tax, and goods and services tax information.
• Issuance: A trading member has to ensure that contract notes are issued within 24 hours of execution of trades on the exchange.

Cost of Trading

• Definition: Additional costs involved in trading transactions on a stock exchange, apart from the price paid for purchasing shares.
• Categories: Trading costs can be classified into three categories:
  • User Charges: Commission charged by brokers, exchange transaction charges, and depository charges.
  • Statutory Levies: Securities Transaction Tax (STT), Goods and Services Tax (GST), Stamp Duty, and SEBI's Turnover Tax.
  • Spread and Impact Cost: The difference between the bid and ask prices, and the cost of executing a trade at a price that is away from the current market price.

SECONDARY MARKETS (Part 7)

• Definition: A secondary market is a platform where existing securities are purchased or sold.
• Details: The Indian Stamp Act, 1899 was amended through the Finance Act, 2019, and the rules came into effect on July 1, 2020.

Key Concepts

• Bid-Ask Spread: The difference between the best buy and sell prices in the market, resulting in a cost to the investor.
• Impact Cost: A measure of the cost incurred due to the bid-ask spread, calculated as the deviation from the ideal price.
• Ideal Price: The average of the best buy and sell prices, used as a reference to calculate the impact cost.

Trading Costs

• Brokerage: A fee charged by brokers for executing trades, varying by security type and investor type.
• DP Charges: Depository participant charges for maintaining demat accounts.
• STT: Securities Transaction Tax, a tax levied on securities transactions.
• GST: Goods and Services Tax, applicable on brokerage fees.
• Stamp Duty: A tax levied on securities transactions, currently at 0.015% of the traded value.

Clearing and Settlement

• Rolling Settlement: A settlement cycle where trades are settled on a T+1 basis, with the exchanges implementing T+1 settlement in a phased manner.
• Squaring Off: Closing a trade on the same day, resulting in no outstanding delivery positions.
• Netting: The process of netting trades at the client and trading member level to determine outstanding obligations.

Settlement Cycle

• Pay-in: The process of delivering securities or funds to the clearing corporation to effect settlement.
• Pay-out: The process of receiving securities or funds from the clearing corporation to complete settlement.
• Securities Pay-in and Funds Pay-in: Processes involved in delivering securities or funds to the clearing corporation.
• Securities Pay-out and Funds Pay-out: Processes involved in receiving securities or funds from the clearing corporation.

Margins and Cross-Margining

• Margin: The amount of funds deposited with the clearing corporation to cover the risk of non-payment or non-delivery.
• Volatility: A measure of the riskiness of share prices, with higher volatility resulting in higher margin requirements.
• Value at Risk (VaR) Margin: A statistical technique used to measure the probability of loss in a stock, with VaR margin rates updated at least five times a day.
• Extreme Loss Margin (ELM): A margin aimed at covering losses outside the coverage of VaR margins, set at 3.5% for any stock.
• Mark to Market (MTM) Margin: A margin computed at the end of each trading day by comparing transaction price with the closing price of the share.

SECONDARY MARKETS (Part 8)

• Definition: Secondary markets refer to the market where securities are traded after they have been issued in the primary market.
• Details: This section focuses on the secondary markets for cash and derivatives segments, except for the commodity derivatives segment.

Key Concepts

• VaR Margins and ELM: Members in the cash segment are required to collect upfront Value-at-Risk (VaR) margins and Extreme Loss Margin (ELM) from their clients.
• Penalty Structure: A penalty structure has been formulated by SEBI for short-collection or non-collection of margins and false or incorrect reporting of margin collection from clients by trading members or clearing members.
• Cross-Margining: Exchanges provide cross-margining benefits in respect of trades executed across cash and derivatives segments, which reduces the margin payable on trades.
• Short Delivery and Payment Auction: If a member is unable to pay in securities on the settlement day, it is known as securities shortage or short delivery, and the clearing corporation conducts an auction session to buy the required shares and deliver to the buyer.

Corporate Actions

• Definition: Corporate actions such as bonus, rights, split, merger, dividends, or warrants impact the price of the equity share.
• Types: Corporate actions can be divided into two categories: stock benefits and cash benefits.
• Record Date: The record date is the date on which all those who are on record as shareholders of a company get the benefit of corporate actions of that company.
• Cum Basis and Ex Basis: When a security is traded on cum basis, it means that it incorporates the benefit of the corporate action in its price, while ex basis means the buyer no longer has the benefit of the corporate action.

Interoperability of Clearing Corporations

• Definition: Interoperability of clearing corporations allows brokers to clear and settle their trades on a single clearing corporation regardless of the exchange platform on which trades were executed.
• Benefits: Interoperability has the following benefits:
  • Brokers can maintain margin deposits and capital funds at a single clearing corporation.
  • It reduces the margin requirement of the client by netting off security positions and derivatives positions across all exchanges.
  • It allows brokers to freely trade on multiple exchanges with a smaller amount of capital deployment at a single clearing corporation.

Trading and Settlement Process

• 3-in-1 Account: An investor who wishes to trade in the stock markets has to open a 3-in-1 account, which is a brokerage account, bank account, and demat account all bundled together.
• Important Features:
  • The investor must ensure sufficient funds in their linked bank account before placing a purchase order.
  • The investor can place different types of orders on the broker's online platform or mobile application.
  • The broker sends an email at the end of each day, showing the details of all orders placed by the investor.
  • The investor gets immediate online confirmation of any orders placed on the online platform.

SECONDARY MARKETS (Part 9)

• Online Trading: Online trade book shows details of all orders executed during the day, while the online order book shows the status of various orders placed by the client.
• Contract Notes: Contract notes for purchase and sale of securities are sent digitally within 24 hours.
• Short Sale: Brokers allow clients to do a short sale of securities in the Margin segment, which involves selling securities not owned by the client.
• Settlement: The security is credited to the client’s demat account on the settlement of the pay-out of securities.

Trading Facilities

• Blocked Amount: Trading supported by blocked amount in the cash segment using UPI block mechanism or 3-in-1 account.
• Securities Lending and Borrowing Mechanism (SLBM): A facility for borrowing securities on a temporary basis from a lender for an agreed period of time and in return for a specific fee.
• SLBM Benefits: Allows market participants to implement strategies like short-selling, reverse cash-and-carry arbitrage, and pairs trading.

Market Information and Regulation

• Market Capitalisation: The number of shares outstanding multiplied by the market price per share, used to measure the market value of a company's share capital.
• Market Turnover: Indicates the trading activity in a stock on a given business day, represented in value terms or volume.
• Market Indices: Tracks the market movement by using the prices of a representative sample of shares, such as the S&P BSE Sensex and Nifty 50 Index.
• Index Uses: Provides real-time data on market movements, serves as a performance benchmark, and captures the state of financial markets.

Reading Market Prices

• Ticker Tape: Shows the last traded price and the change in price compared to the previous day's closing price.
• Live Snapshot: Provides a summary of market activity for listed stocks during market hours.
• Disclosures by Listed Companies: Companies are required to disclose certain information to the public, which can be used by investors to make informed decisions.

SECONDARY MARKETS (Part 10)

• Listing Agreement: Companies seeking listing must sign a Listing Agreement with the stock exchange, agreeing to terms and fees.
• Disclosure Requirements: Listed companies must make certain disclosures, including:
  • Providing facilities for prompt transfer, registration, sub-division, and consolidation of securities.
  • Giving proper notice of closure of transfer books and record dates.
  • Forwarding copies of unabridged Annual Reports, Balance Sheets, and Profit and Loss Accounts to the Exchanges.
  • Filing shareholding patterns and financial results on periodic intervals.
  • Intimating promptly to the Exchange happenings that may materially affect the company's financial performance and stock price.
• Compliance Monitoring: The Listing department of the Exchange monitors compliance with the Listing Agreement, including timely payment of annual listing fees, submission of results, shareholding patterns, and corporate governance reports.
• Penal Action: Defaulting companies may face disciplinary action, including suspension or delisting of securities.

Risk Management Systems

• Capital Adequacy Norms: Members must meet and maintain minimum paid-up capital and net worth norms prescribed under regulations.
• Base Minimum Capital (BMC): Members must deposit and maintain liquid assets with the stock exchange and clearing corporation, with a minimum BMC deposit ranging from Rs. 10 Lacs to Rs. 50 Lacs depending on the category of trading member.
• Margins and Penalties: Margins are required to be made by members before the pay-in date to cover default risk, and penalties are levied on shortfalls.
• Core Settlement Guarantee Fund (SGF): The clearing corporation assumes counterparty risk and manages it through margins and a separate pool of funds known as the Core Settlement Guarantee Fund.
• Online Monitoring: Regular online monitoring of brokers' transactions and positions is carried out to detect abnormal sale or purchase positions or inadequate margins.

Rights, Obligations, and Grievance Redressal

• Investor Rights: Investors have the right to:
  • Get a Unique Client Code (UCC) allotted.
  • Get a copy of KYC and other documents executed.
  • Get trades executed in only their UCC.
  • Place orders on meeting agreed-upon norms.
  • Get the best price.
  • Get a Contract note for trades executed.
  • Know details of charges levied.
  • Receive funds and securities on time.
• Investor Obligations: Investors have the obligation to:
  • Execute Know Your Client (KYC) documents and provide supporting documents.
  • Understand voluntary conditions being agreed upon with the member.
  • Read the Risk Disclosure Document.
  • Understand the product and operational framework and deadlines.
  • Pay margins.
  • Pay funds and securities for settlement on time.
• Grievance Redressal: Investors can approach the Investors Grievance Division (IGD) of the exchange for redressal of grievances, and may also opt for arbitration if not satisfied with the resolution.
• SEBI Complaints Redressal System (SCORES): SCORES is an online investor grievance redressal mechanism set up by SEBI to deal with complaints related to all products and entities regulated by it.

SECONDARY MARKETS (Part 11)

• Definition: Secondary markets refer to platforms where existing securities are traded among investors, providing liquidity and facilitating price discovery.
• Details: Secondary markets play a crucial role in facilitating the trading of securities, including stocks, bonds, and other financial instruments.

Key Concepts in Secondary Markets

• SCORES: SEBI Complaints Redress System (SCORES) is an online platform for investors to lodge complaints against market intermediaries, including brokers, merchant bankers, and depositories.
• Action Taken Report (ATR): The entity concerned must upload an ATR on the complaint, which is forwarded online to the entity for redressal.
• Online Dispute Resolution (ODR): SEBI has introduced an ODR mechanism for dispute resolution between investors and market intermediaries, which can be initiated through the ODR portal.

Investor Protection Fund (IPF)

• Definition: IPF is a fund set up by stock exchanges to compensate investors who have suffered losses due to default by brokers.
• Details: The IPF is administered by a Trust and is used to compensate investors when the defaulting broker's assets are not sufficient to meet the admitted claim.

Secondary Market Trading and Reporting for Debt Securities

• Negotiated Dealing System – Order Matching (NDS-OM): An electronic trading platform for government securities and treasury bills.
• RBI Retail Direct Scheme: A scheme that facilitates retail individual investors in accessing both primary and secondary government securities markets.
• Corporate Bond Market: SEBI has initiated measures to broaden and deepen the corporate bond market, including setting up reporting platforms and making it mandatory for brokers to report OTC trades.

Request for Quote (RFQ) Platform

• Definition: An electronic platform where institutional investors can request a quote for buying or selling corporate bonds and negotiate a trade.
• Details: The RFQ platform is expected to lead to pre-trade transparency in the corporate bond market and boost liquidity and transparency.

SECONDARY MARKETS (Part 12)

• Trade Settlement: A trade that is squared-off during the day does not require delivery of shares, as it is closed before the market closes, eliminating the need for physical settlement.
• Market Capitalization: Market capitalization of a stock is impacted by changes in price of the stock, as it is calculated by multiplying the total number of outstanding shares by the current market price of the stock.
• Key Factors: Other options are not directly related to the impact on market capitalization, although they may have indirect effects. For example:
  • Changes in market index may reflect overall market trends, but do not directly impact individual stock market capitalization.
  • Level of trading volumes and liquidity in the market can influence stock price, but are not direct factors in calculating market capitalization.