You are now well aware of importance and functions of stock exchange from my post.
Imagine, how wonderful it would be if you know the exact working of an exchange and then start your game plan to enter the system and conquer other traders.
Doesn’t it sounds good??
Then why to waste time, let’s dig a bit more into the system and investigate how NSE, the first automated Indian exchange works.
When I came to know that NSE works based on an automated computerized system, I was amazed, how so many transactions are settled without giving any preferences to individuals and by all fair means.
How is the system made transparent and satisfactorily acceptable through computers?
National stock exchange as all other exchanges provides a platform for traders/investors to execute the buy-sell order of securities and other financial assets. It is a fully computerized online trading system where members can get connected sitting in front of their system that may be from various different locations to the main system at NSE through hi-speed satellite telecommunication network system.
So the automated system has connected all its members.
The main story lies in the transaction settlement process.
What actually happens when buy or sell order is placed?
NSE works on a system called Order driven automatic matching system.
Oh!!! Too many heavy words in a single line, let me simplify these words.
The system ensures that the orders are executed without giving priority to the identity of any trader that is the order is not identity driven, rather identity is not even revealed in the settlement of transaction. So whoever you are, equality in execution is ensured, and order for buy and sell are matched to settle any transaction.
Then comes the second part of the question.
How does this automated system determine the price of any security when for the same share there might be thousand of buyers and sellers?
Let me take you through an example to showcase its working.
Assume that a buyer wants to buy 10 Shares of Tata motors at a price of 500 INR of each share. So when the order is placed the system finds a match for the same and if it finds say two sell order of same price willing to sell 5 shares of tata motors, the transaction will settle.
This looks quite simple. Isn’t it.? But it is not like that. Complexity rises when the number of buyers and sellers increases with different price order for same shares at different period of time.
NSE has introduced a system that settles orders on price time priority.
This is done in a manner like when an order is received in the system and as the identity is not revealed an order id is generated in the system. So the order with higher price gets a priority and when the order price remains same then the order IDs executed are on first come basis.
The system usually categorizes the order id into best buy and best sell orders.
This works like the best sell order id is the one with the lowest price so that the buyer will be able to buy at the lowest price while the best buy order is the one with the highest price as the seller will be able to sell at the highest price.
So with this logical approach, NSE ensures that all transactions are settled with fair means.
I hope this is quite easily explained, now you need to think when and how you as a trader must act and understand why your transaction happens in a particular manner or why your order did not get settled.
When I learned its working process I was curious to execute my order and you won’t believe me when I executed my order my security ownership didn’t reflect in my Demat account.
I got puzzled, did I do something wrong? Where are my shares? I browsed lot many sites to figure out the problem unless I came to know this happens to everyone after each transaction.
Are you facing the same problem and is still unaware of the fact what actually happens?
Want to know what happened to my stock and when did I received them back? come with me