Trading Mechanism — entities, the trading system, order types, risk management and costs

Where this chapter sits

Chapter 6 carries 10% of the paper. It is the operational chapter — how a trade actually gets from a client's phone call to the exchange and back.

Three things dominate: order types, price-time priority matching, and the cost structure.

6.1 The entities

The stock exchanges provide a trading platform where the buyers and sellers (investors) can meet to transact in securities.

And ETCD has its own segment: Exchange Traded Currency Derivatives (ETCD) are traded in a separate segment called "Currency Derivatives Segment" (CDS) in stock exchanges. Along with ETCD, Exchange-traded interest rate derivatives are also traded in Currency Derivatives Segment.

The fundamental split: as is the norm for all derivatives exchanges, the trading and settlement are conducted by two distinct legal entities: trading by the Exchange and settlement (along with the associated process of Clearing) by the Clearing Corporation (CC).

Stock exchanges

The Securities Contract (Regulation) Act, 1956 (SCRA) defines a stock exchange as a body for the purpose of assisting, regulating or coordinating the business of buying, selling or dealing in securities.

Its important role is to establish a nation-wide trading facility for various financial instruments. Stock Exchanges ensure equal access to investors across the nation through an appropriate communication network.

Typical functions of Stock Exchanges are:

Providing a trading platform · Dissemination of information · Investor education, awareness and protection · Facilitating redressal mechanism · Surveillance and Investigation · Listing of securities and monitoring compliance of listed companies · Inspection and monitoring of member compliance

Clearing corporations

Clearing Corporation does the clearing, settlement and risk management for trades executed on Exchanges. It also provides a settlement guarantee for such trades.

Trading members and authorised persons

In India, investors cannot access the Exchange platform directly. They have to compulsorily trade through registered stock brokers/trading member of the Exchanges.

A trading member is allowed to execute trades on his own account as well as on the account of his clients. A trading member can be an individual (sole proprietor), a partnership firm, Limited Liability Partnership, Corporate or a bank who is a member of a Stock Exchange.

And banks qualify conditionally: banks are permitted to become member of the currency derivative segment of recognized stock Exchanges subject to fulfillment of minimum prudential requirements.

Authorized person is not a member of a Stock Exchange but is 'Any person, individual, partnership firm, LLP or body corporate, who is appointed as such by a Stock Broker (including Trading Member) and who provides access to trading platform of a Stock Exchange as an agent of the Stock Broker'.

Admission criteria: age, capital adequacy, financial track record, education, experience and fulfilment of criteria of "fit & proper person" as laid down in the SEBI (Intermediaries) Regulations, 2008. And the Exchanges may stipulate additional requirements over and above the SEBI prescribed rules.

The certification requirement — the exam you are taking: to get access to the trading system, a dealer (who will enter deals in the trading system) of the trading member should successfully pass the NISM-Series-I: Currency Derivatives or NISM-Series-XIII Common Derivatives Certification Examination.

Membership combinations: trading member, trading cum self-clearing member and trading cum clearing member.

And a limitation on the plain trading member: entities belonging to the trading member category are allowed to execute their own trades as well as their clients' trades but the clearing and settlement of such trades must be done through a Trading-cum Clearing Member or Professional Clearing Member of the Exchange.

Clearing members

Clearing Members have clearing and settlement rights in any recognised clearing corporation. There are three kinds of clearing members - Professional Clearing Members (PCM), Trading Cum Clearing Member (TCM) and Self Clearing Member (SCM).

Investors

Investors may be individuals, body corporates, domestic financial institutions, Authorised Dealers, foreign portfolio investors etc.

Their channels: internet, phone, direct market access (DMA) (for institutional clients), Securities trading using wireless technology facility (STWT), etc.

The UCC requirement: once the KYC and other details thereon are complete, each client is assigned a unique client code (UCC) by the broker. This acts as an identity for the client with respect to the broker.

SEBI has made it mandatory for all the brokers to use unique client codes for all clients while entering orders on their behalf. It is also mandated by SEBI, that the unique client code should be mapped with the PAN number of the client.

And it must be registered in advance: the broker has to provide the Stock Exchange(s) with the UCC and the PAN details of the client(s) before entering any order/trade on behalf of the client... If the broker fails to register the unique client code with the Exchange, he is liable to be penalized.

6.2 The trading system

All the derivatives exchanges in India provide a fully automated screen-based trading platform for ETCD as part of currency derivatives segment. These trading systems support an order driven market and simultaneously provide complete transparency of trading operations.

Important features of Exchange trading system are:

Screen based trading system Fully automated: No manual intervention Transparent: Quantity and price information related to orders and trades is disseminated on the trading system on a real-time basis Anonymous order matching: The identity of buyer and seller is not revealed to market. Only price and quantity information are available on the system. It is an order-driven platform where order matching is done strictly on price-time priority basis Higher speed of execution: Handling of multiple orders and trade execution Connected to multiple interfaces: Trading system is connected to clearing corporation system, surveillance system of the Exchanges, data vendors system for dissemination of data Risk management facility: To mainly avoid errors related to order entry Nationwide reach: Trading members/participants can have access from any part of the country Trading members can connect to the system by various mode such as lease line, VSAT, co-location etc.

Co-location is offered by the stock exchanges to stock brokers and data vendors whereby their trading or data-vending systems are allowed to be located within or at close proximity to the premises of the stock exchanges, and are allowed to connect to the trading platform of stock exchanges through direct and private network.

Trader Workstation

The trader workstation (TWS) is the terminal from which a member accesses the trading system. Each trader has a unique identification by way of Trading Member ID and User ID.

TWS provides mainly two kinds of information:

Trading member's own transaction Information: Orders entered · Orders modified · Outstanding Orders · Order Log · Trade details

Market Information: Order book · Securities/contract price information · Securities/contract trade information · Additional information

And: to assist trading in various currency contracts, the exchanges also provide spot market currency price feed.

Custom front-ends are permitted: the exchanges have made available products such as Computer to Computer Link (CTCL) / Internet based trading (IBT) / Direct Market Access (DMA) / Security trading through wireless technology facility (STWT) / Automated / Algorithm Trading (ALGO) / Smart order router (SOR) to the Trading Members.

Placing orders

The broker accepts orders from the client and sends the same to the exchange after performing the risk management checks.

Evidence of order placement is mandatory. All brokers are required to execute trades of clients only after maintaining the evidence of such order placement, which could be, inter alia, in the form of: (a) Physical record written and signed by client, (b) Telephone recording, (c) Email from authorized email id, (d) Log of internet transactions, (e) Record of SMS messages, (f) Any other legally verifiable record.

And for phone orders specifically: wherever the order instructions were received from clients through the telephone, the stock broker must mandatorily use telephone recording system to record the instructions and maintain telephone recordings as part of its records.

Phone orders in practice: the client is required to call on the specific numbers intimated or notified from time to time by the stock broker and may be required to provide accurate answers to the questions asked by the dealing desk executive, including the client's user id and TPIN, for ascertaining the genuineness of the caller.

Internet trading — SEBI-registered brokers can introduce internet-based trading after obtaining permission from respective Stock Exchanges.

Direct Market Access (DMA) — a facility which allows brokers to offer clients direct access to the exchange trading system through the broker's infrastructure without manual intervention by the broker.

Its advantages: direct control of clients over orders, faster execution of client orders, reduced risk of errors associated with manual order entry, greater transparency, increased liquidity, lower impact costs for large orders, better audit trails and better use of hedging and arbitrage opportunities through the use of decision support tools / algorithms for trading.

Its history and limits: SEBI in 2008, introduced Direct Market Access (DMA) and permitted institutional investors to use DMA facility. The facility of the DMA provided by the stock brokers shall be used by the client or an investment manager of the client.

Algorithmic trading — any order that is generated using automated execution logic shall be known as algorithmic trading.

"Automated Trading" shall mean and include any software or facility by the use of which, upon the fulfillment of certain specified parameters, without the necessity of manual entry of orders, buy/sell orders are automatically generated and pushed into the trading system of the Exchange for the purpose of matching.

The controls: SEBI has advised the stock exchanges to ensure that all algorithmic orders are necessarily routed through broker servers located in India... The minimum order-level risk controls include a price check and quantity limit check.

And permission plus audit: stock exchanges must ensure that the stock broker provides the facility of algorithmic trading only upon the prior permission of the stock exchange, and brokers are required to subject their algorithmic trading system to a system audit every six months.

High frequency trading (HFT) is a type of algorithmic trading which is latency sensitive and is characterized by a high daily portfolio turnover and high order-to trade ratio (OTR).

Order routing

Once the order is entered and confirmed by the client/dealer at his trading terminal and verified by the broker software, the order is routed to the exchange for its execution. The Exchange system allots a unique order number for all orders received in the system. This is given as order confirmation along with the time stamp to the broker.

The order execution at the exchange depends upon the type of order. If the order is a market order, it gets executed immediately, subject to availability of counter order. If it is a limit order, it is matched against appropriate counter orders. Once the order is matched, a trade is said to be executed.

And on changes: all orders can be modified or cancelled during the trading hours provided they are not fully executed. For the orders, which are partially executed, only the open or unexecuted part of the order can be cancelled / modified.

The order book

The term "order book" refers to an electronic list of buy and sell orders which are available for matching (not yet converted in trade or outstanding order) for a specific security or derivatives contract organized by price level.

An order book lists the number of shares/lot being bid on or offered at each price point, or market depth. It also provides number of orders at each price level. The Exchange order book is generally available up to five price levels based on the priority of matching. The identities of market participants remain anonymous.

Reading it: the left hand side of the order book provides details of buy orders and the right hand side provides details of sell orders. The column "Number of orders" provides information about the number of unique orders available at the given price point.

And the sort order: information about buy prices is provided in the descending order i.e., from the highest to lowest price while the sell price information is provided in the ascending order i.e. from the lowest price to highest price.

It updates live: an order book is dynamic, meaning that it is constantly updated in real-time throughout the day.

The spread order book

Exchanges provide a separate spread order book for participants interested in executing calendar spreads.

The dealer can set up the spread combination contract on TWS and place a Buy Spread order (BSP) and a Sell Spread order (SSP) with individual contracts defaulted for leg1 and leg2.

For e.g. USDINR future MAR24MAY24 spread contract allows participants to trade the difference of price between USDINR MAY24 futures (Far month contract/2nd leg contract) expiry and MAR24 (near month contract/1st leg contract) expiry.

A feature unique to this book: the difference which is shown on the spread contract can be positive, negative, or zero, which is not possible for all other contracts other than spread contracts.

Matching and pricing: the orders are matched in the spread order book on price-time priority only, where the price is basically the difference between the far-month contract and near-month contract.

Traded price for the first leg contract = Reference price Traded price for the second leg contract = Reference price + the price difference entered for the spread order where, the Reference price = Last Traded Price of the first leg contract.

And the direction convention, which is counter-intuitive: a buy side spread means sell near-month leg (first leg) and buy the far-month leg (second leg). A sell side spread means buy in near-month leg (first leg) and sell in far-month leg (second leg).

Buy spread order of 10 lots in USDINR MAR24MAY24 futures means: sell 10 lots in USDINR MAR24 futures and buy 10 lots in USDINR MAY24 futures.

Why use it: the issue with entering a calendar spread trade as 2 separate orders is that there is a risk of adverse price movement between placing of both the orders. The trader is also subject to a higher margin requirement till the second order is executed. Both these issues can be fixed by using the spread order facility in the spread order window.

Order matching

Exchanges follow continuous matching based on price-time priority. An order may match partially with another order resulting in multiple trades. 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 buy orders and similarly best sell price is the lowest price of all sell orders.

Why: the system views all buy orders available from the point of view of a seller and all sell orders from the point of view of the buyers in the market. So, of all buy orders available in the market at any point of time, a seller would obviously like to sell at the highest possible buy price that is offered.

Active and passive orders: orders lying unmatched in the system are 'passive' orders and orders that come in to match the existing orders are called 'active' orders.

And the pricing rule that follows: orders are always matched at the passive order price. The matching of active order may be against a single order or multiple passive orders. Quantity is not a factor considered for matching.

The worked example. With a best sell of 100 shares @ Rs.807.60 and an incoming order... to buy 200 shares at Rs.807.65: a trade will take place for 100 shares at Rs.807.60 and not at Rs. 807.65. It should be noted that the incoming order is always matched with the passive order price... The balance buy order for 100 shares @ Rs.807.65 will sit in the order book on the buy side as the best buy order.

And the general rule: all orders come as active orders into the order book. If they get a match, they will be executed immediately; else they will enter the order book according to their price and time as passive orders.

6.3 Order management

Order management consists of entering orders, order modification, order cancellation and order matching.

The main components of an order are: Price · Time · Quantity/No. of Contracts · Security/Contract · Action (Buy/Sell) · Client identity (UCC) and Proprietary/Client identifier.

And a timing constraint: trading members are allowed to enter orders in the trading system during market hours only.

The three families of order conditions

The order conditions are broadly classified into three categories: price-related conditions, time-related conditions, and quantity-related conditions.

A. Price conditions

Market Order — a market order is where a trader purchases or sells their contracts at the best market price available across the market depth to complete the order quantity/lot. In the market order there is no need to specify the price.

Two variations: market order without protection and Market order with protection. The market order without protection means that the trades are executed at the best available price/s in the market at that point in time. The second type of market order i.e. market with protection order is a combination of market and limit order. It allows the market order to be executed up to a specified level mentioned by the trader. The risk of an order getting executed at any price is protected by using such order.

The worked example. With the best sell 100 lots @ Rs.82.60 and the next 119 @ 82.65: a market buy for 100 lots executes wholly at 82.60. If a buy order is placed for 200 lots "at Market" then the trade will take place for 100 lots at Rs.82.60 and another 100 lots at Rs.82.65.

A market order walks up the book — that is exactly the risk protection guards against.

Limit Order — limit orders involve setting the entry or exit price and then aiming to buy at or below the market price or sell at or above it. Unlike a market order, the trader here needs to specify the price. The price can be changed any time before order execution. Reaching these limits/targets is not always possible and sometimes the orders are not executed.

Stop Orders (orders with stop loss triggers) — this facility allows the Trading Member to place an order which gets activated only when the market price of the relevant security reaches or crosses a threshold price. The order does not enter the market until the threshold price is reached.

In a stop order, the client enters two prices: one is the trigger price and the other is the limit/market price.

The sell stop loss example: Bought 400 lot of USDINR futures at Rs.83... Investor may place a sell stop loss order at a trigger price of Rs.82.80. When the USDINR futures price drops to Rs.82.80 or below, the sell stop loss order will get triggered... The investor may specify a limit price (which can be equal to or less than trigger price), for example in this case, Rs.82.75... It will match only if a corresponding buy order exists for Rs.82.75/- or better. If it is a stop loss with market order, once triggered it will match with the best counter order available.

The buy stop loss example: Sell 400 lots of USDINR futures at Rs.83... The investor may place a buy stop loss order at a trigger price of say Rs.83.25... The investor can specify a limit price (which can be equal to or more than trigger price), for example in this case, the limit price could be Rs.83.28.

Note the direction of the limit relative to the trigger — below for a sell stop, above for a buy stop.

And the general rule for buy triggers: a buy order in the stop loss book gets triggered when the last traded price in the normal market reaches or exceeds the trigger price of the order.

One caution: it is also important to note that once the order is triggered, it will match only if the counter order is available in the order book.

B. Time conditions

DAY — an order which is valid for the day on which it is entered. If the order is not matched during the day, it gets cancelled automatically at the end of the trading day.

IOC — an Immediate or Cancel (IOC) order allows a trading member to buy or sell a security as soon as the order is released into the market, failing which the order is removed from the market. Partial matching is possible for the order, and the unmatched portion of the order is cancelled immediately.

GTC — a Good Till Cancelled (GTC) order is an order that remains in the system until it is cancelled by the Trading Member. It will therefore be able to span trading days if it does not get matched.

GTD — a Good Till Days/Date (GTD) order allows the trading member to specify the days/date up to which the order should stay in the system. And each day/date counted is a calendar day and inclusive of holidays. The days/date counted are inclusive of the day/date on which the order is placed.

COL — Cancel on Logout: If a member/user entered order with COL, all outstanding orders of the user will get cancelled once the user logs out from the TWS.

Note: Currently, GTC and GTD orders are not available on the system as per SEBI directives.

C. Quantity conditions

DQ — Disclosed Quantity — an order with a DQ condition allows the Trading Member to disclose only a part of the order quantity/lot to the market. For example, an order of 1000 lots with a disclosed quantity condition of 200 will mean that "200 lots" is displayed to the market at a time. After this is traded, another 200 lots are automatically released and so on till the full order is executed.

MF — Minimum Fill — allow the Trading Member to specify the minimum quantity by which an order should be filled. For example, an order of 1000 lots with a minimum fill of 200 will require that each trade must be for at least 200 lots. In other words, there will be a maximum of 5 trades of 200 each or a single trade of 1000.

AON — All or None — allow a Trading Member to impose the condition that only the full order should be matched against. This may be by way of multiple trades. If the full order is not matched it will stay in the books till matched or cancelled. There will be no partial execution of the order.

Note: Currently, AON and MF orders are not available on the system as per SEBI directives.

So of the seven named conditions in the time and quantity families, four — GTC, GTD, AON and MF — are currently unavailable. Only DAY, IOC, COL and DQ operate.

Pro and Cli

'Pro' means that the orders are entered on the trading member's own account. 'Cli' means that the trading member enters the orders on behalf of a client.

Proprietary trading has a location restriction: the facility of placing orders on proprietary account through trading terminals is extended only at one location of the member... Trading terminals located at places other than the above location will have a facility to place orders only for and on behalf of a client. But proprietary trading is allowed from more than one location subject to certain conditions. Members need prior approval of the exchange.

Modification, cancellation, execution

All orders can be modified till the time they are not fully executed. Order modification is allowed only for certain parameters like price, quantity etc. Also, in certain scenarios the order will lose time priority due to order modification.

And on cancellation: only those orders which have not been fully or partially executed can be cancelled during market hours.

Trade execution occurs when a buyer and seller reach an agreement pertaining to the terms and price of a trade and the order to buy or sell a security is completed after the same is matched on the Exchange platform.

A single order can have multiple trade numbers. And official communication from the broker to the client is done through a contract note.

Trade modification is allowed for parameters like client code and custodian participant code. However, there are certain conditions and timings for such modifications. Also, these modifications may attract penalties.

Trade annulment: Trading members are allowed to submit a request for trade annulment on the trading system. The request should be submitted within 30 minutes from the point of trade execution. A fee based on value of trade(s) for which annulment is requested, subject to a minimum and a maximum fee is charged as annulment application fee.

6.4 Risk management

The obligation to settle the trades lies with the broker. If any client commits any trade default, then the same has to be made good by the broker to the clearing corporation.

The broker system should have an on-line risk management capability for all orders placed on the exchange platform. Brokers should have various trading limits (like Order Quantity and Value Limits, User/Branch Order Limit, Order Price limit, etc.) on the system and only such orders which are within the parameters specified by the risk management system are allowed to be pushed into the exchange trading platform.

On margins: a margin is an amount that clearing corporations levy on the brokers for maintaining positions on the exchange. The amount of margin levied is proportional to the exposure and risk carried by the broker. Since positions may belong to a broker's clients, it is the broker's responsibility to collect the margin upfront from clients.

The three procedures:

Establish Standards and Reports — every broker has a set of standards which they adhere to, and these are the standards against which a client is measured... These must be reported to the management for their perusal and action.

Impose Position Limits and Rules — a key element of financial risk management is deciding which risk to bear and to what degree. And SEBI and exchanges prescribe from time to time the open position limit for various categories of products.

Set Investment Guidelines and Strategies — the board's role is usually described as setting the risk appetite of the organization; however, this is not possible if risks are understated or ill defined.

6.4.1 The three risks

Operational risk is the risk of monetary loss resulting from inadequate or failed internal processes, manual and systems error or external events. For a broker: handling of client assets, regulatory non-compliance, trading error, non-payment for buying or selling a scrip, non-delivery of scrip(s), denial of matched order by clients, sudden closure of banks where funds are deposited etc.

Market risk refers to the possibility of incurring large losses from adverse changes in financial asset prices. For a broker: concentration of client collateral in stocks/sectors, brokers own investment in stocks/sectors etc. It is usually affected by economic developments and political destabilization such as a rising fiscal gap, national debt, terrorism, energy price shocks, increase in interest rates.

Credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments. For a broker: Loans to Group Companies/Related Parties, debit balance of clients, funding of clients, short collection of margins, non-confirmation of DVP trade by the custodian etc.

6.4.2 Pre-order and pre-trade checks

There are various pre-order (checks which are applicable before order entry into the trading system) and Pre-trade (checks which are applicable before execution of the trade) checks.

Pre-order checks:

Price range check: Orders are allowed to be entered within a specific price range Quantity Freeze: Single order quantity/lot cannot exceed the limit specified by Exchanges Single order quantity/value limit: This limit is specified by the trading member for its dealer User order value limits: This limit can be set up by the trading member for its dealer/branch Cumulative open order value checks: ...for its dealer/branch/trading member level UCC/PAN check: The Trading member can put this check to ensure that the order is not entered for an unregistered client

Pre-trade checks:

Trade Execution Range: Orders are matched, and trades can place only if the trade price is within the trade execution range based on the reference price of the contract Self-Trade Check: If the Pro/Client orders entered by the same/different members result in self-trade due to the same PAN or CP code... the same results in the active or passive order getting cancelled Market price protection Kill Switch: This allows a member to cancel all outstanding orders with one single command Cancel on Logout (COL)

IRRA

A joint platform to provide Investor Risk Reduction Access (IRRA) service has been developed by the exchanges to provide the investors an opportunity to square off/close the open positions and/or cancel pending orders in case of disruption of trading services provided by the Trading Member.

Its features: the IRRA service shall support multiple segments across multiple exchanges. TMs, upon facing technical glitches which lead to disruption of trading services, can request for enablement of the IRRA service.

Once enabled, all the investors of the TM shall be informed by the exchange of the availability of the service through email/SMS and a public notice on exchanges' website.

And a crucial limit: the IRRA service shall not permit any action that increases the risk of the investor.

It also gives the broker a window: IRRA service shall also provide the TM with access to an Admin Terminal, through which the TM can monitor the actions of investors.

Who it is for: the IRRA system is exclusively for individual investors and does not cater to algorithmic trading or institutional clients. Furthermore, its primary function is to facilitate the closure of positions and the cancellation of pending orders & not the initiation of new positions.

Technical glitches

Stock brokers shall inform about the technical glitch to the stock exchanges immediately but not later than 1 hour from the time of occurrence of the glitch.

Stock brokers shall submit a Preliminary Incident Report to the Exchange within T+1 day of the incident.

Stock brokers shall submit a Root Cause Analysis (RCA) Report... within 14 days from the date of the incident.

The RCA must include time of incident, cause of the technical glitch (including root cause from vendor(s), if applicable), duration, chronology of events, impact analysis and details of corrective/preventive measures taken.

The reporting portal: SEBI has developed a web-based portal, i.e. Integrated SEBI Portal for Technical Glitches (iSPOT).

And a monitoring mechanism: the stock exchange has advised to build API based Logging and Monitoring Mechanism (LAMA) to be operated between stock exchanges and specified stock brokers' trading systems.

Business continuity

For the interoperable segments — Cash Market/Equity Derivatives/Currency Derivatives/Interest Rate Derivatives etc.:

If identical or correlated trading products are available on another trading venue, then participants can hedge their open positions by taking offsetting positions in identical or correlated indices on other exchange... Hence, no separate treatment is required for such category of products.

The intimation timeline: the affected exchange should... intimate about the invocation of the instant business continuity mechanism to the alternative trading venue and SEBI within 75 minutes of occurrence of impact. The alternative trading venue would invoke the business continuity plan as per the Standard Operating Procedure (SOP) within 15 minutes from such intimation.

And who covers whom: NSE would act as an alternative trading venue for BSE and vice-a-versa.

6.4.3 Surveillance

The exchanges as first-level regulators have an online surveillance capability that monitors positions, prices, and volumes in real time so as to deter market manipulation.

The systems must: monitor open interest, cost of carry, and volatility · monitor closing prices · capture and process client level details · develop databases of trading activity by brokers as well as clients · generate trading patterns by a broker over a period of time or by a client/group of clients over a period of time.

And alerts are automatic: the alerts in the online surveillance system automatically generate material aberrations from normal activity.

Member inspections feed the system: the information and feedback received from member inspections are vital inputs for effective surveillance.

6.5 Price limit circuit filter

With a view to ensure orderly trading and market integrity, SEBI prescribes stock exchanges to implement a mechanism of price bands so as to prevent the acceptance of orders placed beyond the price limits set by the stock exchanges.

For currency futures, both INR and cross-currency: there are no daily price bands applicable for Currency Futures contracts. However, in order to prevent erroneous order entry by members, operating ranges are kept at +/-3% of the base price for contracts with tenure up to 6 months and +/- 5% of base price for contracts with tenure greater than 6 months. The dynamic price bands are relaxed in increments of 1% as and when a market-wide trend is observed.

The worked examples: in March 2024, the USDINR contract expiring in April with a base price of Rs.83, will have an operating range of Rs. 80.51-85.49 and the USDINR contract expiring in October with base price Rs. 84.50 will have an operating range of Rs. 80.275-88.725.

Check the first: 3% of 83 = 2.49, giving 80.51 and 85.49. And the second: 5% of 84.50 = 4.225, giving 80.275 and 88.725.

For options the rule is different: the price operating range is based on the delta of the options contract and calculated using the previous close price of the underlying and volatility. The price band so computed is subject to a minimum operating range which would be applicable for all contracts. The bands are computed for each options contract on a daily basis and are applicable from the next trading day. The operating range may be flexed during the day.

6.6 Trading cost

While trading in ETCD on behalf of client, a trading member should specify the various charges, including brokerage, payable by the client to avoid any disputes at a later date.

a. Statutory levies: These are charges levied by Central/State governments e.g. Goods and Service Tax, Security Transaction Tax (STT), Stamp Duty, etc. and may be recovered from client only at actuals paid/payable.

And an important exemption: currently, STT is not applicable for ETCD transactions.

b. Regulatory levies/charges: These are charges levied by SEBI/Exchanges/Clearing Corporations. For e.g. SEBI turnover fees, Exchange transaction charges, etc. These too may be recovered from the client only at actuals paid/payable.

c. Brokerage can be charged as may be mutually agreed between the member and the client subject to the maximum permissible by the exchange, and brokerage rates should be mentioned in a tariff sheet.

The brokerage caps:

In the case of futures, the maximum brokerage chargeable by a trading member in relation to trades executed on the exchange is 2.5% of the contract value exclusive of statutory levies. Brokerage on options contracts cannot exceed 2.5% of the premium amount or Rs.100/- per lot whichever is higher. There is no minimum brokerage requirement specified.

The types of broker: full-service brokers charge higher commission · discount brokers charge a much lower commission than full-service brokers · online brokers cater to a niche segment of retail clients, where the commission charged is less than what would be charged for a client placing orders through a broker.

And the schemes: volume-based commission · slab-wise commission or scrip-wise commission.

SEBI turnover fees

Currently for Currency Derivatives the SEBI turnover fees is Rs. 10 per crore of turnover. A clearing member/self-clearing member must pay a fee of Rs. 50000/- per year till the registration is in force.

How turnover is computed: it shall include the value of the trades executed by the stock broker on the concerned segment... and of the trades settled on the expiration of the contracts. In case of options contracts, 'turnover' shall be computed on the basis of premium traded for the option contracts and in case where the option is exercised or assigned, it shall be additionally computed on the basis of notional value of option contracts exercised or assigned.

Stamp duty

The Central Government, through requisite amendments in the Indian Stamp Act, 1899... has created the legal and institutional mechanism to enable states to collect stamp duty on securities market instruments at one place by one agency... on one Instrument.

Sharing between states is based on the state of domicile of the buyer. And exchanges/clearing corporation will collect the stamp duty from member. Members have to collect the stamp duty from their clients and remit the same to the Exchange/Clearing Corporation.

And the base: for the purpose of stamp duty, each futures trade is valued at the actual traded price and an option trade is valued at premium.