Security Trading, Settlement and Regulations

SECURITY TRADING AND
SETTLEMENT
Initial Draft by:Hemanshu Sood

MBAfEX(3rd Semester)
BASICS
A security is a tradable financial asset.
A security is a financial instrument that represents an ownership position .
It is a negotiable financial instrument that represents some type of

financial value.
Settlement of securities is a business process whereby securities or

interests in securities are delivered
It is just the process whereby payment is made by all those who have made
purchases and shares are delivered by all those who have made sales.
Trading securities is a category of securities that includes both debt and

equity securities, and which an entity intends to sell in the short term for a
profit that it expects to generate from increases in the price of the
securities
HOW SECURITIES ARE TRADED

Securities Issue
New
securities issued in a primary market such as NYSE
Shares
of publicly listed firms trade continually on well

known markets such as NYSE or NASDAQ
Trades
in existing securities take place in secondary
markets
Private
and Public firms may decide to raise capital from

a range of investors, hence they make decision to sell its
securities to public and allow those shares to be traded in
established securities markets

Securities Issue
Initial
Public Offer
IPOs
are typically smaller firms who are responsible for first issue of shares
(1) public offer is sold to public and later traded;
(2) private placement - sold to few
institutional investor and then held
until maturity
Public
offerings of stocks and bonds typically are marketed by investment

bankers who in this role are called underwriters
Source:Investment by
Bodie,Kane 10th
Edition

SHELF REGISTRATION
In 1982, SEC passed Rule 415 that allows firms to register securities for a 2-year
period and market them when needed
UNDERPRCING
New
issues are often underpriced
Conflict
of interest: a guarantee of
issue success, less proceeds to
issuing firm.

TYPES OF MARKETS
Direct
Least
Organized market
Good
participation, low priced and substandard goods
Least
profit to firms
Brokered
Involvement
Real
of broker to initiate buyer and seller
estate market
Dealer
Dealers
inventory
Dealer
specialize in various assets, purchase them and sell at a profit from their
markets save traders on their search costs
Auction
Most
NYSE
integrated market

Orders
market
limit
order: order to buy/sell at prevailing price
order: a order to buy/sell at a certain price or within a certain time
period
stop-loss
order: stop-loss order is an order to sell if the price falls below a

certain level; a stop-buy order to buy if price is above a certain level --- these
orders are accompanied by short sales.
Source:
www.nyse.com
TRADING MECHANISMS
Specialist System
A person in charge of 8-10 stocks and smoothens out the supply

and demand of the stocks
specialist sometimes provides liquidity by buying/selling on his/her

account
performs broker and dealer function
specialist system exists in NYSE
Market Maker System
a market maker quotes a bid-ask price for a stock in the market

for other investors to buy/sell stock;
market maker takes risk
Source:Investment
by Bodie,Kane 10th
Edition
SETTLEMENT
Settlement involves the delivery of securities from one party to another.
Traditional (physical) settlement
Payment was usually made by papercheck
Electronic settlement
Legal significance
After the trade and before settlement, the rights of the purchaser
arecontractual
Delivery of securities to complete trades
References
www.nyse.com
Investments by Bodie,Kaine 10th Edition
www.renaissancecapital.com
SECURITIES
REGULATIONS
Organizations Regulating
Securities Markets in India
Five agencies have a significant regulatory influence, directly or
indirectly, over the securities markets in India currently. These
are
The Company Law Board (CLB for short) which is a judicial body
that exercises some of the quasi judicial and judicial powers
under the Act previously exercised by the High Court and the
Central Government
The Reserve Bank of India (RBI) which is primarily responsible,

for the supervision of banks and money markets
Securities and Exchange Board of India (SEBI) which is

responsible for the regulation of capital markets and the various
participants and activities therein
Department of Economic Affairs (DEA) which is responsible

for the economic management of the country and is the
arm of the government that is concerned with the orderly
functioning of the financial markets as a whole.
Ministry of Corporate Affairs (MCA) which is at the apex of a

three tier structure that has responsibility for the
registration and oversight of incorporated entities which
fall under the regulatory purview of the Companies Act
SEBI
TheSecurities and Exchange Board of India(SEBI) is

theregulatorfor thesecuritiesmarket in India. It was established in
the year 1992 and given statutory powers on 12 April 1992 through
theSEBI Act, 1992.
Controller of Capital Issues was the regulatory authority before SEBI

came into existence; it derived authority from the Capital Issues
(Control) Act, 1947.
The SEBI is managed by its members, which consists of following:
The chairman who is nominated by Union Government of India.
Two members, i.e., Officers from Union Finance Ministry.
One member from the Reserve Bank of India.
The remaining five members are nominated by Union Government of India,

out of them at least three shall be whole-time members.
Functions and
responsibilities
The Preamble of the Securities and Exchange Board of India

describes the basic functions of the Securities and Exchange
Board of India as "...to protect the interests of investors in
securities and to promote the development of, and to regulate
the securities market and for matters connected there with.
Prohibiting fraudulent and unfair trade practices relating to

securities markets.
Regulate the working of stock brokers, sub-brokers, share

transfer agents, bankers to an issue, merchant bankers etc.
Functions and responsibilities

(cont..)
SEBI has to be responsive to the needs of three groups, which

constitute the market:
a)
the issuers of securities
b)
the investors
c)
the market intermediaries.
Issuers
For Issuers it provides a market place in which
they can raise finance fairly and easily.
Investors
For investors it provides protection and supply
of accurate and correct information.
Intermediaries
For intermediaries it provides a competitive
professional market.
Securities And Exchange Board of

India Act, 1992
Preamble
An Act to provide for the establishment of a Board to
protect the interests of investors in securities and to
promote the development of and to regulate the
securities market and for matters connected
therewith or incidental thereto.
Securities and
Exchange Board of India Ac
Functions of Board
To protect the interests of investors in securities and to

promote the development of, and to regulate the securities
market.
Regulating the business in stock exchanges and any other

securities markets.
Registering and regulating the working of venture capital

funds and collective investment schemes, including mutual
funds.
Prohibiting fraudulent and unfair trade practices relating to

securities markets.
Prohibiting insider trading in securities.
Regulating substantial acquisition of shares and take-over of

companies.
Powers of Board to Issue

Directions
To approve by-laws of stock exchanges.
Inspect the books of accounts and call for periodical

returns from recognized stock exchange.
Compel certain companies to list their shares in one or

more stock exchange.
To impose monetary penalties
To Regulate Insider trading
References
SEBI Website - http://www.sebi.gov.in/sebiweb/
SEBI Regulations http://www.sebi.gov.in/sebiweb/home/list/1/3/0/0/Regu

lations
Securities And Exchange Board of India Act, 1992

http://www.sebi.gov.in/cms/sebi_data/attachdocs/14563
80272563.pdf

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SECURITY TRADING AND

Initial Draft by:Hemanshu Sood

A security is a tradable financial asset.

A security is a financial instrument that represents an ownership position .

It is a negotiable financial instrument that represents some type of

Settlement of securities is a business process whereby securities or

Trading securities is a category of securities that includes both debt and

HOW SECURITIES ARE TRADED

securities issued in a primary market such as NYSE

of publicly listed firms trade continually on well

in existing securities take place in secondary

and Public firms may decide to raise capital from

HOW SECURITIES ARE TRADED

offerings of stocks and bonds typically are marketed by investment

HOW SECURITIES ARE TRADED

issues are often underpriced

HOW SECURITIES ARE TRADED

participation, low priced and substandard goods

of broker to initiate buyer and seller

markets save traders on their search costs

HOW SECURITIES ARE TRADED

order: order to buy/sell at prevailing price

order: a order to buy/sell at a certain price or within a certain time

order: stop-loss order is an order to sell if the price falls below a

A person in charge of 8-10 stocks and smoothens out the supply

specialist sometimes provides liquidity by buying/selling on his/her

performs broker and dealer function

specialist system exists in NYSE

Market Maker System

a market maker quotes a bid-ask price for a stock in the market

market maker takes risk

Settlement involves the delivery of securities from one party to another.

Traditional (physical) settlement

Payment was usually made by papercheck

Delivery of securities to complete trades

Investments by Bodie,Kaine 10th Edition

The Reserve Bank of India (RBI) which is primarily responsible,

Securities and Exchange Board of India (SEBI) which is

Department of Economic Affairs (DEA) which is responsible

Ministry of Corporate Affairs (MCA) which is at the apex of a

TheSecurities and Exchange Board of India(SEBI) is

Controller of Capital Issues was the regulatory authority before SEBI

The SEBI is managed by its members, which consists of following:

The chairman who is nominated by Union Government of India.

Two members, i.e., Officers from Union Finance Ministry.

One member from the Reserve Bank of India.

The remaining five members are nominated by Union Government of India,

The Preamble of the Securities and Exchange Board of India

Prohibiting fraudulent and unfair trade practices relating to

Regulate the working of stock brokers, sub-brokers, share

Functions and responsibilities

SEBI has to be responsive to the needs of three groups, which

the issuers of securities

the market intermediaries.

Securities And Exchange Board of

To protect the interests of investors in securities and to

Regulating the business in stock exchanges and any other

Registering and regulating the working of venture capital

Prohibiting fraudulent and unfair trade practices relating to