WHAT IS STOCK MARKET ORDER SYSTEM?

A broker/sub-broker is a member of a recognised stock exchange who is permitted to trade through the screen- based trading system of different stock exchanges. He is enrolled as a member with the concerned exchange and is registered with the Securities & Exchange Board of India (SEBI). Meanwhile, with the advent of internet- based online trading, the dependency on brokers has reduced considerably.

Every broker/sub-broker is required to be registered with SEBI and hold a separate registration for every stock exchange. A broker’s registration number begins with the letters ‘INB’ and that of a sub-broker with the letters ‘INS’. For the brokers of the derivatives’ segment, the registration number starts with the letters ‘INF’. In case of any doubt, you can confirm from the respective stock exchanges or SEBI. And make sure that your broker is a registered member.

Before the trading session actually commences, the members of the stock exchange collect orders from their clients, 62 DSIJ.in MAR 24 - APR 6, 2014 which can be from individuals, banks and other institutional investors. The orders may even be from farflung places or other stock markets and are communicated personally or over the telephone or the internet. Nowadays, with the online trading system, investors can directly log on to their online trading account and trade themselves.

Let us begin with understanding an order. When you want to buy something you need to order the same, right? Similarly, stocks also need to be ordered through an online trading system or through brokers. Thus, when you log on to any of the exchange terminals, you will see detailed information pertaining to any company in the electronic book, such as previous day’s close price and today’s open, high, low and recent traded price of a company etc, to be able to provide a fair idea about the price dynamics of any trade.

In addition, you will find the best buy price (bid) on the left side and best sell price (ask) on the right side. What do they indicate? There are many buyers and sellers who want to buy or sell at different prices which are shown at the bottom of bid and ask. All these orders may not be transformed as the trade will happen only when the best bid (highest buy price) matches the best ask (lowest sell price).

Always remember that ‘ask’ will forever be greater than ‘bid’. Confused? It is simple. When you want to buy, you look for a low price and vice versa. It’s the same as going to a vegetable market and deciding to buy a kg of onion. You quote (bid price) `13 and the seller says `15 (ask price). At this juncture, both the orders are pending and trade will happen when either you agree on `15 or he agrees on `13 or both of you agree for an equilibrium price arrived at Rs14.

HOW ARE ORDERS EXECUTED?

An investor informs a broker to place an order on his behalf. The broker enters the order through his PC, which runs under Windows NT, and sends a signal to the satellite. The signal is directed to the mainframe computer at the office of the NSE or the BSE. A message relating to the order activity is broadcast to the respective member. The order confirmation message is immediately displayed on the PC of the broker. This order matches with the existing passive order(s), or else it waits for the active order(s) to enter the system. On the matching of order(s), a message is broadcast to the respective member.

ACTIVE & PASSIVE ORDER

When any order enters the trading system, it is an active order. It tries to find a match on the other side of the books. If it finds a match, a trade is generated. If it does not find a match, the order becomes a passive order and goes and sits in the order book. The order form for ‘buy’ is in blue / green and ‘sell’ is in the red colour with all the details like name or symbol, quantity and price of the share for easy identification. If you put an order and wait for the whole day but cannot get an order, it gets cancelled for the day and you have to post a new order the next day in order to continue with it

Whenever you put an order, it should be confirmed on the screen immediately through an order number. The trading system operates on a strict price time priority. All orders received on the system are sorted with the best priced order getting the first priority for matching i.e the best buy orders match with the best sell orders. Then similar priced orders are sorted on a time priority basis, i.e the one that came in early gets priority over the latter ones and so on.

HOW THE ORDERS MATCH?

For immediate execution of orders, the best sell order is the order with the lowest price and a best buy order is the order with the highest price. The unmatched orders are queued in the system by the following priority:

(a) By Price A buy order with a higher price and a sell order with a lower price get high priority. For example, consider the following buy orders: 1) 100 shares @ `105.00 at 9:30 am. 2) 200 shares @ `105.05 at 9:43 am. Which order do you think will get executed first? The answer is the second order as its price is greater than the first order price and therefore is the best buy order.

(b) By Time If there is more than one order at the same price, the order entered earlier gets priority. For example, consider the following sell orders: 1) 100 shares @ `100.75 at 9.30 am. 2) 150 shares @ `100.75 at 9.35 am. Both orders have the same price but were entered in the system at different times. As the first order was entered before the second order, it is the best sell order.

There are three important documents that record your transactions through the concerned exchange – ‘order confirmation slip’, ‘trade confirmation slip’ and a ‘contract note’. After you have placed the order specifying your conditions, your broker should give you an order confirmation slip and after the trade has taken place, you should get a trade confirmation slip. Normally, brokers give a contract note within 24 hours of the execution of the trade, once the deal is through. The contract note is an important document as it contains details of the trade, the price and brokerage charged within. You should preserve this note for tax purposes. It would also help you later to resolve any disputes with the broker regarding the exact time and price at which the deal was struck.

TYPES OF ORDERS

An increasing number of investors are now opting for an internet-based broker for their trading. This often means that they must know exactly the type of buy or sell order they want to enter. We explain some of these orders, which work with both internet-based system and a person.

Market Order
A market order is the simplest and quickest way to get your order filled (or completed). It instructs your broker to buy or sell the stock immediately at the prevailing price, whatever the price be. In a volatile market it may change, but you will get a closer price.

Stop Loss Order
A stop loss order gives your broker a price trigger that protects you from a big drop in a stock. You enter a stop loss order at a point below the current market price. If the stock falls to this price point, the stop loss order becomes a market order and your broker sells the stock. If the stock stays level or rises, the stop loss order does nothing. Stop loss orders is like cheap insurance that protects you from incurring a major loss.

Trailing Stop Order 
A trailing stop order is similar to the stop loss order, but you use it to protect a profit, as opposed to a shield against loss. If you have profit in a stock, you can use the trailing stop order to follow it up. You enter the trailing stop order as a percentage of the market price. If the market price declines by the said percentage, the trailing stop becomes a market order and your broker sells the stock. If the stock continues to rise, the trailing stop follows it up.

Fill Or Kill Order
 Under the fill or kill order, the broker is required to execute the trade at once. Failure to do so results in an un-executed order.

Day Order
A day order is any order that remains pending for the day. If your broker does not fill your order on that day, you will have to DS re-enter it the next day.