Equity Markets - Trading and Operations

8/10/2019 Equity Markets - Trading and Operations

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Equity MarketsTrading & Operations

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Chapter 1: Equity MarketsIntroduction

Capital markets are classified into two categories:

1. Primary Market:Primary market is the market where a financial instrument is first issued/

offered to the public. The interaction is between the issuer and the investor.

2. Secondary Market:Secondary market is the market where the instrument is subsequently

traded (bought and sold). The interaction is between one investor (seller) and another

investor (buyer).

Based on the nature of trading, secondary markets are classified into:

1. Listed Market: Trading where an auction method is used at a physical location, or an

automated mode of trading through an exchange.

For example, stock markets.

2. Over-The-Counter (OTC) or Unlisted Market:A negotiated market without a

physical location where transactions are done via telecommunications. For example,

currency markets.

Trade Life Cycle:

The trade life cycle of a financial instrument has five stages:

1. Issuance

2. Pre-Trade Analysis

3. Trade

4. Post-Trade

5. Asset Servicing

Activities

From an operational perspective, financial market activities can be classified into Front, Middle

& Back office.

Front office handles the trade decision, trade execution and the first stage of the post trade

process i.e. Deal capture

Middle office handles the trade decision support, and any risk management relating to the

deal.


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Back office handles the actual processing and settlement of the transaction.

Market Participants

Trading participants in the equity markets are classified as follows:

Banks & Brokerage Firms:Banks and brokerage firms are members of stock exchanges. The

exchange interacts with the members, who in turn interact with their clients/investors. Banks

and brokerage firms are said to be on the sell side.

Fund or Portfolio Managers: Fund or portfolio managers manage accounts of institutions like

mutual funds or of highly wealthy individuals. They are also called asset managers.

Corporates and Individual Investors: These investors are the ones who invest their

surpluses into the capital markets.

Funds/Investment Managers/Corporates /Individuals are said to be on the buy side.

Other Market Participants

The other market players who facilitate the post trade process are:

Clearing Firms:A clearing firm is an organization thatworks with the exchanges to handle

confirmation, delivery and settlement of transactions.

Depository: Securities are held in electronic (also called dematerialized) form in the demat

(short for dematerialized) accounts at firms providing depositoryservices.

Custodian Banks: These are banks where the clients hold their demat accounts. They

facilitate clearing and settlement for the client, by interacting with the broker members,

depositories and clearing corporations.

Exchange: The exchange facilitates trade execution and the clearing and settlement of

securities through their various agencies such as clearing firms.

Regulators: SEBI regulates the stock market to ensure smooth functioning.

System Vendors: These are technology service providers who automate the various processes

and ensure processing with minimal manual intervention.


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Some Key Terms

American Depository Receipt (ADR):ADR is a negotiable certificate issued by an American

bank. It represents a certain number of shares of a foreign company, which have been

deposited with them.

Bull Markets: Itrefers to a market that is on the rise. There is a sustained increase in market

share prices. Investor confidence & expectations are high in a bull market.

Intrinsic Value: The intrinsic value of a share, as against its market driven prices, is its

fundamental strength and future potential. This is also called fair value.

Market Capitalization: Market capitalization is the total market value, at the current market

price, of the total number of equity shares issued by a company.

Market Capitalization = Market Price * Number of Outstanding Shares of the

Company

Participatory Notes (P-Notes/PNs):Participatory notes are instruments issued by

registered Foreign Institutional Investors (FIIs) to overseas investors. This is issued to those,

who wish to invest in the Indian stock markets without registering themselves with the market

regulator - SEBI (Securities and Exchange Board of India).

Trading Philosophy:

1. Top-Down Investing- In this approach, an investor considers important parameters like

trends in the economy, industries which these trends favor and companies within these

industries which are likely to benefit the most.

2. Bottom-Up Investing- Bottom-Up investing involves looking for individual shares with

outstanding performance or potential, without considering economic trends.

Classification of Stocks

Stocks are classified into the following categories for trading purposes:

1. Growth Stocks

2. Income Stocks

3. Cyclical Stocks

4. Defensive Stocks

5. Value Stocks


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6. Contrarian Stocks

7. Momentum Stocks

Chapter 2: Trade Life Cycle - Issuance

Issuers

Issuers are of mainly two categories.

Governments

To fund their fiscal deficit

To fund a specific project

Corporations

To fund their expansion plans

Corporations issue equity. The process is called issue management and is typically handled by

the merchant banking arm of a bank or a financial institution.

The merchant bank acts as the facilitator to the issue for corporations, by

Advisingthe form of issuance (debt or equity).

Pricingthe issue, based on the company and market conditions.

Processing & Distributing i.e., managing the entire process of selling the issue to the

public.

Investors

There are three categories of investors for any public issue and the issuer may reserve a quota

for each category. They are:

Retail Individual Investor (RII): refers to an investor who applies or bids for securities for

a value of not more than INR 2, 00,000.

Qualified Institutional Buyers (QIBs): This category of investors includes public financial

institutions, commercial banks and other institutions like provident funds, pension funds etc.

High Networth Individuals (HNIs): Investors who do not fall within the above two

categories are called High Networth Individuals (HNIs) or Non Institutional Investors.


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SEBI has also allowed the introduction of Anchor investors - under which a buyer can subscribe

up to 30% of the institutional investors quota in an IPO.

Issuance Process

The issuance process is as follows.

Checking the company eligibility:

Filing a prospectus:

Applying for listing at the exchange:

Agreement with the depository for demat:

Bidding process and allotment:

Final Allotment

Once the bids have been collected from investors at various prices, the final offer price is

decided. This is done by accepting bids from the highest price and then going in descending

order till the required issue amount is reached. The last price accepted would be the cut off

price. Shares are allotted to all successful bidders at the cut-off price.

In case the issue is oversubscribed, the allotment is pro-rata.

Private Placement

Under this, the shares are directly placed in large chunks, with a few interested institutions.

Follow on Public Offering

Companies that already have their shares listed in the exchange can raise funds by issuing

additional shares to the public. This is called a Follow on Public Offering (FPO).

A company going in for an FPO has two options.

1. Rights Issue:It may issue these additional shares to the existing shareholders only. This

helps to maintain their ownership in the company. The shareholder has the choice to accept

or reject the rights.

2.

Public Offer:It may also issue these shares to the public at large. In this case, thepercentage ownership of the existing owners will reduce.

Underwriters

In case, an issue is undersubscribed, the underwriters take the balance amount.


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Foreign Currency Convertible Bonds (FCCB)

FCCBs are debt instruments issued in foreign currency. Like any other bond, investors in this

type of bonds get regular coupon (interest) and principal payments.

However, the difference is that FCCB holders also have an option to convert their bonds into

stocks at a pre-determined price (known as conversion price) at a future date.

Depository Receipts

These are certificates issued by an overseas depository bank against certain underlying

stock/shares of an Indian company. The shares are deposited by the issuing company with the

depository bank. The depository bank in turn tenders these receipts to the investors.

Chapter 3: Trade Life Cycle: Pre-Trade Analysis

Once the instrument comes into existence (issuance), investors start taking interest in the

instrument. They start collecting market information to make a trading decisioni.e. whether

to buy or sell the share. This is based on:

1. Fundamental analysis

2. Technical analysis

Fundamental Analysis

This involves analyzing the fundamentals of the company in question. Its a three step process:

1. Analysis of the EconomyEvaluate various economic parameters such as

Gross Domestic Product (GDP)- This is the sum total of all products and services

produced by the country

Inflation - Inflation gives signals for future interest rate actions.

Index of Industrial Production (IIP) - It shows the health of the industrial sector.

Fiscal Deficit - It affects the credit rating of the country, and has been the biggest

stumbling block for the poor rating of India.

Political Scenario - Any political uncertainty results in postponement or stoppage of

foreign inflows into the domestic market. The reverse will be true, if a single party getsa strong mandate from the people..

2. Analysis of the IndustryThe next step is to analyze factors that affect specific

industries. For example: An appreciating rupee will affect the IT industry.

3. Analysis of the CompanyFinally analyst should study the specific company within an

industry. Fundamental analysis of a company involves techniques such as:


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Vertical AnalysisIt is used to compare companies of different sizes by expressing all

components of the P&L are expressed as a % of sales and all components of the balance

sheet as a percentage of the total.

Horizontal AnalysisIt shows the trend across time. Growth of each component of the P&L,

balance sheet over a period (say, 5 years) is shown and analyzed.

Ratio Analysis - Different financial ratios are computed and compared across companies in

the same industry.

Key Financial ratios

1. Earnings Per Share (EPS)= Profit After Tax (PAT)/Total no. of Equity Shares (Issued).

The higher the EPS, the better the companys performance as compared to its peers.

2.

Price to Earnings Ratio (P/E Ratio)= Market Price of the Share/Earnings per Share(EPS). Given the companies with similar fundamentals and future outlook, a company with a

lower P/E ratio is preferred over the other.

3. P/BV Ratio= Market Price of Share/Book Value (BV) of Share. The lower the ratio, the

better the value, for investing in the stock.

4. Book Value per Share= (Equity Share Capital + Reserves)/Total no. of Equity Shares

(Issued). For a running company, the market price should not typically fall below the book

value.

5. Dividend Yield (%) = (Dividend per share/ Market price of share) * 100

The higher the ratio, the more attractivethe stock in the long term

6.

Volatility (%) = [(Highest PriceLowest Price of the share)/ Market price of share] *100. Higher the volatility, greater the risk.

Technical Analysis

Technical Analysis is a method of prediction of share price movements based on a study of

price graphs or charts. It is based on the assumption that share price trends are repetitive.

The market analyses historical prices and looks for patterns such as

Double top Formation- Assuming historical patterns will repeat themselves, you will infer

that this stock fallsevery time the pricereaches a particularresistance point.

Double Bottom Formation- Assuming historical patterns will repeat themselves, you willinfer that this stock risesevery time the pricereaches a particularsupport point.

Breakout Pattern - Shares move between the support level and the resistance level for

some time. At some point, when the share prices move upwards or downwards beyond the

line, they make a breakoutfrom their price limits.

Head and shoulders- Head and shoulders is a reversal pattern that, when formed, signals

the security is likely to move against the previous trend.


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Use of TrendlineIt is a straight line drawn to connect the highest or lowest prices of a share over a period in the

immediate past.

If there is a price reversal, that is, if the price rises above a downward trendline or drops

below an upward trendline, technical analysts conclude that a new direction is emerging.

Analytics/Simulation

Institutional clients, who run large equity portfolios also on a regular basis, also conduct what

are known asanalytics or simulations. This involves

Creating various scenarios and applying them on their portfolio to study the possible impact.

Taking some extreme situations that have taken place in the past 10 years and applying

them to the portfolio. This is calledstress testing.

Chapter 4: Trade Life Cycle: Trading Process

Trading Account

Prior to trading, the investor has to open a trading account with a member of the exchange

called thebroker. The account can be of two types:

1. Securities Account: These are for delivery based trades, where actual physical delivery of

securities and cash takes place.

2. Margin Account: Margin account is used for margin trading. These are non delivery based

trades, that is, only the profit or loss on the trade is exchanged - not the actual securities.

KYC Policy

This policy requires member firms to be able to prove that, they know enough about their

clientsinvestment requirements and financial position.

KYC is to prevent:

Money Laundering - Money laundering is the criminal practice of disguising ill-gotten

gains, ordirty money, through a series of transactions.

Insider Trading- Insider trading is only illegal when a person bases their trade of stocksin a public company on information that the public does not know.

Trading takes place in the secondary market, once the shares get listed in the exchange. It can

happen in two ways:

1. Open Outcry: Exchanges where an auction method is used, at a physical location. Example:

New York Stock Exchange.


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2. Order Matching System: Exchanges where trade execution is automated. Example:

Bombay Stock Exchange. The process is as follows:

Order placement -> Order Routing -> Order matching -> Order Execution.The trading system electronically matches orders on a strict price/time priority.

Types of Orders

1. Price Based Orders

a) Market Orders: Market orders are executed at once, at the prevailing market price.A

market order guarantees execution, but does not guarantee a price.

b) Limit Orders:A limit order is executed at a set price or better, and will not be executed if

that price is not met. A limit order thus specifiesa quantity and a price.

c) Stop Loss Orders: This facility allows the trader to input an order when the market price

of the security reaches, or crosses, a threshold price called the trigger price or stop loss

order price.

2. Time Based Orders:

a) Day Order:A Day Order is valid till end of trading day.

b) Good till Cancelled (GTC) Order:A GTC order gets automatically renewed till it gets

executed.

Trading Screen Disclosed Quantity -An order with a Disclosed Quantity (DQ) allows the user to disclose

only a portion of the order quantity to the market.

Protection % - Market price protection functionality gives an option to a trader to limit the

risk of a market order, within a pre-set percentage of the Last Traded Price (LTP).

Chapter 5: Trade Life Cycle: Trading Strategies

Classification of Stocks

Stocks can be classified into various categories from a trading perspective.

Interest Rate Sensitive StocksThese are the stocks that are benefitted by lower interest

rates. For example, banking sector performance has a direct correlation to interest rates.

Mantra:Market interest rates are expected to move lowerBUY!


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Policy Driven StocksThe Indian government fixes the prices of petrol, diesel, cooking gas

and kerosene. Any announcements on changes in these prices will directly affect these stocks.

Their price trend has nothing to do with the fundamentals of the company.

Mantra:Stay Out!

Large, Mid & Small Cap Stocks - Stocks can be classified in terms of market capitalization.

Small Cap - Companies that have a market capitalization of less than INR 5000

crores.

Mid Cap - Companies that have a market capitalization between INR 5000 -

10000 crores.

Large Cap - Companies that have a market capitalization of more than INR 10000 crores.

Small cap stocks tend to carry more risk from a fundamental perspective. Most investors

prefer large cap stocks given its liquidity and relatively lower volatility.

Commodity Pack - These include metals like steel (example: Tata Steel) and aluminum

(example: NALCO). These are stocks that are highly dependent on global commodity prices and

the state of the global economy.

Mantra:When the global economy is on a downturn - SELL!

Stocks Driven by Domestic Demand

These are stocks that derive their growth from domestic demand, and hence are relatively

insulated from global events. For exampleITC, Airtel, HUL etc.

Mantra:In times of global turmoil - Stay Invested!

FII Favourites - These are stocks that are preferred by Foreign Institutional Investors and

move in tandem with their operations.

Mantra:If FIIs are pulling out of stock markets, GET RID of those stocks quickly!

Stocks Vulnerable to External Economies - This contains mainly IT and BPO companies. In

fact, any largely export driven company can fall under this category.

Mantra:In times of global turmoil - Get Out!

Industry Specific Factors

1. IT/BPO Industry

A strong dollar or a weak rupee is beneficial to this sector.

Secondly, the key resource in this industry is labor.

Finally one should also look at customer margins on the service contracts.


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2. Banking Industry

Traders must look at growth in Net Interest Margins (NIMs) that is interest on loans less

interest on deposits.

The growth in the amount of Non-Performing Assets (NPAs) is also an indicator of decline inasset quality, and thereby NIMs.

Trading Beta

Beta is a measure of systematic risk. It compares the sensitivity of value of a security with the

movements in the market index.

Beta () = Covariance (Index, Stock)/Variance (Index)

Interpretation of Beta

Beta = 1 indicates that the stock would move precisely in line with the market index. That

is, if the index moves up 5%, the stock will move up 5%. 0 < Beta < 1 indicates that the stock is less volatile as compared to the market index, and

hence lower risk.

Beta > 1 indicates that the stock is more volatile than the market index, and hence higher

risk.

Beta < 0 represents an inverse relationship between the stock and the market index. That

is, when the market goes up, the stock goes down, and vice versa.

Margin Trading

Margin -An investor who purchases securities may pay for the securities in full or may borrow

part of the purchase cost from his brokerage. The portion of the purchase cost that the investor

deposits is called margin.

Margin trading - It is a credit (lending/borrowing) relationship between the brokerage firm

and the investor. Investor uses margin trading

i. To increase his purchasing power,

ii. To leverage his investment that is to magnify the returns on his investments.

How does the lender protect himself?

The investor's credit facility is secured against the purchased securities held in his margin

account as collateral. After selling the securities, the investor has to repay the borrowed money

in accordance with the terms of the margin facility.

Profit earned by the investor = Selling price of stock - Purchasing price of stock -

interest charged on the margin loan - transaction costs


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Margin Rules

The local regulators or the exchanges have rules that govern margin trading.

Brokerage firms can establish their own requirements as long as they are at least as

restrictive as that of the regulators.

Only corporate brokers with a net worth of at least INR 3 crore are allowed to offer margin

trading facility to investors.

An investor needs to enter into an agreement (margin account) with the broker for availing

margin trading facility.

Types of Margins

1. Initial Margin -The portion of the purchase price to be deposited by the investor before

doing the transaction is the initial margin.

2. Maintenance MarginAfter investor buys a stock on margin, the exchange requires him

to keep a minimum amount of equity in his margin account. The equity in his account is

the market value of his securities less how much he owe to the brokerage firm.

3. Margin Call -If the value of investors shares held with the broker falls below the

maintenance margin percentage, the broker will call for further collateral. This is called a

margin call.

Chapter 6: Trade Life CyclePost Trade

The post trade stage relates to all the activities relating to clearing and settlement of the

trade and begins once the trade has been executed.

Clearing

The process of transmitting, reconciling and in some cases confirming payment orders or the

security transfer prior to settlement.

Settlement

The act of transferring securities and final funds between two parties.

Settlement can be of two types.

Gross Settlement: In this, settlement happens transaction by transaction.

Net Settlement: Settlement after multiple transactions, for the net amount.


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Banking terminology:

Real Time Gross Settlement (RTGS) - Settlement of funds occurs on a

transaction-by-transaction basis, continuously, and in real time, without nettingdebits against credits.

Deferred Net Settlement (DNS) - Running balances are calculated on a bilateral

or multilateral basis for each participant vis--vis the other participants, and only net

amounts are settled at pre-specified times during the day.

Settlement Conventions:

Settlement conventions vary across markets and across countries.

Market ConventionIndia Stock Market T+2

U.S. Stock Market T+3

Government Bonds T+1

Currency Market T, T+1, T+2 or even > T+2

T is the date of the transactionand the number denotes the number of working days

(excluding holidays) after the transaction.

Post TradeClearing Process

Clearing ProcessStreet Side:

The street side workflow for clearing is as follows:

1. Customers place their order with the brokers

2. Brokers execute the trade on the exchange

3. Brokers send execution confirmation to their customers

4. Brokers send trade details to their custodians

5. The exchange sends the trade details to the Clearing Corporation (CC)

6. CC generates confirmation to the brokers and their custodians

7. Brokers affirm the trades through their custodians to the CC.

8. Typically a broker is his own custodian. In that case he affirms the trade himself

The Clearing Corporation now nets all the trades with the counterparties and reduces these

transactions to a single net amount for each security and for cash, at the end of the day. This

happens through a process called Continuous Net Settlement (CNS).


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CNS is an automated book entry accounting system, based on multilateral netting. It identifies

each brokers net position on each security traded.

In multilateral netting, the netting is done across all brokers.

Clearing ProcessCustomer Side:

The clearing process on the customer side is part of the execution confirmation. The broker will

inform the customer of the number of shares and the payment due to/from him.

Role of Clearing Corporation:

The buyer and seller are dealing with the exchange. The exchange, through the clearing

corporation, becomes the counterparty to both the buyer and seller.

CC thus acts as the central counterparty and guarantees settlement. This prevents any risk of

default.

Post TradeSettlement Process:

To understand the settlement process, we must know two terms:

Pay-in and Pay-out of both securities and funds.

Pay-in:

Customer side - Customers hold their demat accounts with DPs.

Before pay-in on the street side, the selling customer instructs the DP to transfer security

balances to the broker members share pool account.

Similarly, the buying customer instructs the bank to transfer cash to the broker members cash

pool account.

Street side- The CC will inform the depository to make shares of the companies available from

the relevant broker members account to the CCs securities pool account.

Similarly the CC will inform the clearing bank to make the amount available from relevant

brokers account to the CCs cash pool account.


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Pay-out:

Street side- The CC will inform the depository to debit the CCs securities pool account now

and credit the relevant broker members account.

The CC will informs the clearing banks to debit the CCs cash pool account and credit the

relevant broker members account.

Customer side- The relevant broker member will then transfer the cash (less of course the

commission and taxes) to the selling customers account.

From the pool account, the broker member will give the securities to the buying customer

accordingly, by issuing instructions to his DP.

Settlement ProcessTimelines:

Day Time Activity

T+2 11:00 AM Pay-in of securities and funds

T+2 1:30 PM Pay-out of securities and funds

Settlement FailuresShortages Handling

A broker/customer sold his shares. On T+2 day he failed to deliver the shares. This is called a

settlement failure.

How does the CC handle this shortage?

T+2 Day- On the securities pay-in day (T+2), the CC identifies short deliveries if any. The

respective broker is debited by an amount equivalent to the securities not delivered by him and

valued at a valuation price.

The valuation price for securities shall be the closing price of such securities on T+1.

T+3 Day- The CC then conducts a buy-in auction for security shortages on the day after the

pay-out day (T+3).

If the buy-in auction price is more than the valuation price, the member is required to make

good the difference.

T+5 Day- The auction trade settles on T+5.


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Securities Lending and Borrowing:

Short sale is when you sell something that you do not own.

SEBI has announced a securities lending and borrowing scheme (SLBS), by which you can

borrow securities for such purposes.

SLBS Rules:

National Securities Clearing Corporation Limited (NSCCL) as an approved intermediary has

launched the Securities Lending & Borrowing Scheme (SLBS) from April 21, 2008.

Borrowing Period- The tenure of lending and borrowing ranges from 1 month up to a maximum

period of 12 months. Accordingly the return of securities by borrower is scheduled on the

respective reverse leg settlement day.

Eligibility- In order to become eligible to participate in SLBS, brokers shall have to register as

participants in SLBS.

Participants -Participants desirous of lending or borrowing securities can do so either on their

own account or on behalf of their clients.

Prior to undertaking lending or borrowing of securities on account of clients, the participant

shall enter into an agreement with each client as per the format specified by NSCCL.

The participant shall apply to NSCCL for allotment of a unique client ID for each client who

desires to participate in SLBS.

Steps in SLBS process:

1. Short seller sells shares in the market.

2.

Short seller borrows the shares from lender.

3. Short seller buys back the shares from the market.

4. Short seller returns the shares along with the lending fees.

Chapter 7: Trade Life CycleAsset Servicing

Asset servicing functions begin after the trade has settled, and are performed as long as an

investor holds the security. They relate to post-settlement actions taken by the companies for

their shareholders.


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Asset Servicing encompasses the following activities:

Income Collection

Corporate Actions Reporting

Income Collection:

These relate to dividends for shareholders. Dividends are earnings distributed to the

shareholders. They are expressed as a percentage of Face Value or after the SEBI directive,

expressed as amount per share.

Key Dates:

Declaration Date The date the dividend is announced

Record Date The date, based on which the company will decide who is entitled to the

dividend.

Payment Date the date when the actual payment is made

Ex-dividend dateThis is the date on which the buyer pays a reduced price for the security

adjusted for the dividend.

Generic Workflow:

1) Capture Detail of Benefit

2)

Calculate Entitlement3) Collect Benefit

4) Credit Owner

Corporate Actions:

These can be:

Mandatory ActionsShareholder has no option but to accept. Merger/Takeover - It is a

combination of two companies into one larger company. The old shares are cancelled and

shares of the new entity are given in exchange.

Stock Split -A company splits the face value of its shares into a smaller denomination tomake it more affordable and accessible to a wider section of the public.

Liquidation - This is when a company becomes insolvent and is forced into liquidation.

Once this happens, all the assets of the company are sold off and the liabilities and

shareholder obligations are paid out of the proceeds.

Spin Off - This is an event where a portion of a company is broken off and established as a

separate legal entity.


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Voluntary Actions Shareholder has the option to accept/reject.

Rights Issue -Rights Issue is an offer to existing owners to buy additional shares of the

company. The issue price is typically at a discount to market price.

Convertibles - These are instruments that convert into equity shares, at the option of the

investor.

Tender Offer - This is an open offer to buy sharesof a company.

Asset ServicingReporting

Asset Servicing also encompasses certain other activities such as

Pricing -Custodians price customers portfolios periodically, to inform them of the profit or

loss.

Reporting -The custodian makes periodic reportingof the holdings in each share and the

market value of the positions, to the client.

Chapter 8: Risk Management

Exchanges manage risk by imposing margins on the broker members.

Margins in the cash market segment comprise the following three types:

Value at Risk margin Extreme Loss margin

Mark to Market margin

Value at Risk (VaR) margin

A VaR Margin is a margin intended to cover the maximum probable loss (in %) that may be

faced by an investor on a single day with a 99% confidence level.

The VaR margin is then computed as follows:

For Group I shares, the VaR margin rate would be the higher of:

3.5 times volatility or

7.5% of value of the transaction.

For Group II shares, the VaR margin rate would be the higher of:

3.5 times volatility or

3 times the VaR of the index*3.


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Fi iti ti L i I di P t Ltd (FLIP) 2013 P i t t t Pl d t i !

For Group III shares, the VaR margin rate would be equal to:

5 times the VaR of the index*3.

The VaR margin is collected on the gross open position of the member. The gross open positionfor this purpose would mean the gross of all net positions across all their clients including their

own open (proprietary) position.

Extreme Loss Margin

The Extreme loss margin for any stock is higher of:

1.5 times the standard deviation of daily returns of the stock price in the last six months.

5% of the value of the position.

MTM Margin

Profit or Loss also called Mark to Market (MTM) is calculated at the end of the day on all open

positions. This is done by comparing the transaction price with the closing price of the share for

the day.

The MTM loss if any is payable before the market opens the next day. This is the MTM margin.

Trading Limits

Besides the margins imposed by the exchange, institutions trading in equities, also impose

internal limits on the individual traders for their proprietary trading portfolio. These are called

market risk limits.

This can be classified into:

Position Limits

Loss Limits

Position limits describe the maximum net open position a trader can have in his equities

portfolio. This could be a limit on an individual stock or on the portfolio as a whole.

Loss limits describe the maximum loss a trader can incur on a single day.

Equity Markets - Trading and Operations

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Transcript of Equity Markets - Trading and Operations