From outcry to screenplay

INDEPENDENCE SPECIAL/ STOCK MARKETS

Indian stock markets have transformed dramatically, thanks to the introduction of screen-based trading and dematerialisation.

From open outcry system to screen-based trading and now web trading; from physical certificates to shares preserved in electronic form; from T+15 to T+2 settlement "" technology has brought in the winds of change to the Indian stock market.

Markets have become more transparent while trading and settlement have become quick and efficient. Introduced in 1994, after the National Stock Exchange came into being, screen-based trading was rolled out within a year across the country. This put an end to all the screaming, literally.

More importantly, it made the stock markets more democratic. In the open outcry system, only eight representatives of a broker were allowed to go to the Ring and trade.

Investors were allowed to watch from the investors' gallery and they had to physically visit the broker's office to place an order. A representative of the broker would then rush to the Ring and execute the trade. And now, every small investor in every nook and corner of the country can trade on his own at the click of a button.

The cost of transaction has come down and become equal irrespective of where one trades from.

Says C B Bhave, chairman and managing director, National Securities Depository Limited, "The share of Mumbai in terms of volume, which was 80 per cent during the outcry system, has now come down to 40 per cent."

This led to better liquidity in the market. In the seventies, the turnover was very low at Rs 40 crore; in 1982 it touched Rs 100 crore. Greater liquidity again has led to narrowing of spreads.

But then, till the introduction of electronic shares, investors outside Mumbai were still at a disadvantage. Since share certificates were maintained in physical form, it was difficult to handle and highly time consuming, and involved high cost.

Also, it exposed investors to the risk of fake certificates. To prevent this and also attract foreign investors, the government decided to introduce dematerialisation of shares to ensure that the title was genuine. Thus came the two depositories, putting an end to the problem of bad deliveries.

Screen-based trading and dematerialisation helped speed up the settlement process. Unlike the Kapli system of the past wherein each transaction was recorded on the Block (register where all transactions were recorded while trading was going on) and Contractwalas settling trades physically, settlement now happens seamlessly from once every alternate week to once every two days.

Earlier, brokers going bust was a common occurrence. Since the settlement would take place every 15 days whichever way the stock went during the interim period, investors could hold on to their position without worry.

There were no margins to be paid. And no mark-to-market either. If the client decided not to pay the broker on the day of the settlement, the broker would fail, unsettling other brokers too.

"Since the broking community was close-knit with brokers also being the office-bearers of the exchange, they were quite lenient in their approach. Brokers would get time to honour their commitments. The idea was to save the market," says a stock broker. Now there are margins that brokers dread. But then, that is for their own safety.