Tuesday, February 9, 2010

TRADING MECHANISMS: A Survey of Major Exchanges of the World

(This is our term paper for the Market Micro-structure Course) 
- Surenderrao Komera
- Ganesh Sankar
Exchanges facilitate the traders with the place where they can meet to arrange trades. Only members can trade at most exchanges, these members include brokers, dealers and buy-side traders. Nonmembers trade by asking member brokers to trade for them. Till recently, traders principally used to meet on the exchange floors and execute their trades. Owing to technological advancements, exchange floors became obsolete and replaced by the electronic communications networks through which now traders meet and execute their trades. Some exchanges only provide the plot forum where agents representing different stock facilitate the trades in those stocks. Such exchanges are referred as agent or dealer driven trading systems. Other exchanges are order-driven trading systems which arrange the trades by matching the buy and sell orders according to some pre-set rules.

Over the years exchanges of varying set of rules have evolved in different parts of the world to cater the needs of the investment community. They reflect varied aspirations of widely dispersed players across the globe. Though they serve the similar set of players, and aim at the similar objective achieving the fair price for the assets, they are guided by different set of rules and practices. In the present essay, we aim to discuss and compare the trading mechanisms and trading rules of various exchanges of the world. We mainly focus on five major international exchanges such as NYSE EURONEXT, London Stock Exchange (LSE), Shanghai Stock Exchange (SSE), Singapore Stock Exchange (SGX), and Tokyo Stock Exchange (TSE); and two domestic exchanges such as National Stock Exchange (NSE) and Bombay Stock Exchange (BSE); and survey their trading mechanisms, order types and their priority rules, and risk management mechanisms.


NYSE Euronext, the holding company created by the combination of NYSE Group, Inc. and Euronext N.V., was launched on April 4, 2007. NYSE Euronext operates the world’s largest and most liquid exchange group and offers the most diverse array of financial products and services. NYSE Euronext, as a for profit corporation operates multiple securities exchanges notably Euronext (Paris), New York Stock Exchange (NYSE),  NYSE Arca (formerly known as ArcaEx),  Euronext.liffe (derivatives), Powernext (Paris, Energy sector) and  Alternext (small and medium sized firms).

Some Statistics:

Number of firms listed: 8500
Current Market Capitalization: $ 16.7 trillion

Market Mechanism:

The NYSE has long been the leader in providing the best prices and lowest trading costs. Its unique market model allows it to accomplish this. The NYSE blends the best aspects of electronic trading and traditional open-outcry, auction market trading. To be able to trade securities on the Trading Floor, an Exchange-issued trading license is required. Only qualified and approved NYSE broker-dealer entities may acquire and hold trading licenses. Most of those holders are either floor brokers or specialists:

Floor Brokers. Brokers represent public orders to buy or sell shares and work to get their customers the best price. Brokers participate both in person and electronically on the Trading Floor and have advanced tools to assist them in handling trades on behalf of their clients. Two main types of floor brokers work on the Trading Floor: house brokers and independent brokers. House brokers are employed by brokerage firms that hold accounts for public investors. These market professionals buy and sell securities as an agent for their customers. The majority of independent brokers are “direct access” brokers who deal with institutional investors at low commission rates.
Specialists. Each stock listed on the NYSE is allocated to a specialist, a market professional who acts as the contact point between brokers with orders to buy shares and brokers with orders to sell shares. Specialists act as auctioneers in the specific stocks they are designated to trade at a designated location, called a trading post. All buying and selling of a given stock occurs at that location. Specialists use enhanced technology to bring buyers and sellers together, improve prices, and serve as a point of accountability for the smooth functioning of the market. The Hybrid Market automates much of what specialists do, helping them become much more efficient.

Trading Hours: The New York Stock Exchange, NYSE, is open from Monday through Friday 9:30 a.m. to 4:00 p.m. ET.

Trading process and Tick sizes: Market opens with the call auction and closes with the call auction. During the main trading hours there will be continuous trading on the stocks listed.
Circuit Breakers: To reduce volatility and promote investor confidence, NYSE is implementing a pause in trading i.e., investors are given time to assimilate incoming information and the ability to make informed choices during periods of high market volatility. The halt for a 10% decline would be one hour if it occurred before 2 pm. and for 30 minutes if it occurred between 2 and 2:30, but would not halt trading at all after 2:30. The halt for a 20% decline would be two hours if it occurred before 1 p.m., and between 1 p.m. and 2 p.m. for one hour, and close the market for the rest of the day after 2 p.m. If the market declined by 30%, at any time, trading would be halted for the remainder of the day.

Type of Orders: An order is an instruction to a stockbroker or dealer to buy, sell, deliver, or receive securities or commodities. The order commits the issuer of the order to the terms specified in the order. The following are the available types of orders on the NYSE Euronext.

Market Order:  An order to buy or sell at the best price currently available.

Limit Order: An order to buy or sell when and if a security reaches a specific price.

Good Til Cancelled (GTC) Order: An order to buy or sell at a specific price until the investor cancels the order.

Scale Order: An order to buy or sell a security that specifies the total amount to be bought or sold at specified price variations.

Stop Order: An order to buy at a price above or sell at a price below the current market. Stop buy orders are generally used to limit or protect unrealized profits on a short sale. Stop sell orders are generally used to protect unrealized profits or limit loss on a holding. A stop order becomes a market order when the stock sells at or beyond the specified price and, thus, may not necessarily be executed at that price.

  1. London Stock Exchange (LSE)

The London Stock Exchange is a stock exchange located in London, United Kingdom. Founded in 1801, it is one of the largest stock exchanges in the world, with many overseas listings as well as British companies. In October 2007 the Exchange merged with Borsa Italiana, creating Europe's leading diversified exchange business, London Stock Exchange Group. Thus, the exchange is now part of the London Stock Exchange Group.

Some Statistics:

Number of firms listed: 2,899
Current Market Capitalization:  $ 2.32 trillion

Market Mechanism:
Securities are allocated to a particular trading mechanism based on a number of criteria, the most important of which is liquidity. There are currently three different mechanisms used to support the trading of UK companies. The most liquid shares are traded on the order book.

Order book Stocks:

The electronic order book, SETSTM, has transformed the way the most liquid UK shares are traded. It is a fully automated, screen based system for all of the securities in the FTSETM 100 index and many securities in the FTSE 250 index. The order book is based on an order matching system in which member firms display their bid (buying) and offer (selling) orders to the market. Orders entered into the system are displayed anonymously and are automatically executed during continuous trading when the price details match one another.

Non-order book stocks:

Trading in non-order book securities is supported by market makers who quote bid and offer prices for the securities in which they are registered, and the maximum transaction size to which these prices relate. These prices are firm to other Exchange member firms. Prices for larger transactions are subject to negotiation. Market makers are obliged to display this information to the market, throughout the trading day.

For the least liquid stocks, a hybrid market model is used, combining market maker quotes and an order book.

Trading Hours: The exchange operates its trading from Monday to Friday during 9.00 to 16.30 hours GMT

Circuit Breakers: Apparently, LSE doesn’t have any market wide or stock wise circuit breakers.

Type of Orders: The following types of orders are available for the traders.

At best (SETS):  An order specifying a volume which is filled at the best price(s) on the order book.

Execute and eliminate (SETS): An order to execute as much of an order as possible up to a specified price. The remainder is deleted.

Fill or kill (SETS): An order specifying a volume and maximum/minimum price. If the
entire order cannot be executed at this price or better, the entire order is rejected.

Limit order (SETS): An order specifying a volume and price at which execution should take place.

Market order (SETS): An order to buy or sell at the best price currently available.

LSE recently introduced the following type of order to increase the depth of the market.

Hidden limit orders: Allow participants to enter a limit order where both the price and volume are hidden. This means that participants do not know how big the order is, and unlike an iceberg where there is a continual refresh in the peak size, participants have no idea if it is there or not. These orders can only be entered where it meets the Large-In-Scale or Large Order Threshold considerations.

Hidden pegged orders: Allow participants to peg their order to, or at a differential or offset to, the Exchange’s Mid Price. Hidden pegged orders provide greater flexibility and increase the likelihood and immediacy of execution.

Mid price orders enable execution at the true mid price, i.e. within the tick size, so if the security is at a one tick spread, execution will occur at half a tick, delivering half a tick price improvement.

Minimum Execution Size: Available for non-displayed order types, Minimum Execution Size (MES) enables customers to stipulate the minimum aggregate volume against which the order can be executed in continuous trading. MES protects participants from small volume orders thereby limiting information leakage.

  1. Shanghai Stock Exchange (SSE)

The Shanghai Stock Exchange (SSE) is a Chinese stock exchange or bourse that is based in the city of Shanghai. It is one of the three stock exchanges operating independently in the People's Republic of China; the other two are the Shenzhen Stock Exchange and the Hong Kong Stock Exchange. Unlike the Hong Kong Stock Exchange, the Shanghai Stock Exchange is still not entirely open to foreign investors due to tight capital account controls exercised by the Chinese mainland authorities.

The securities listed at the SSE include the three main categories of stocks, bonds, and funds. Bonds traded on SSE include treasury bonds (T-bond), corporate bonds, and convertible corporate bonds.

Some Statistics:

Number of firms listed:  864
Current Market Capitalization: $ 3.95 trillion

Market Mechanism:
In order to trade securities on the Exchange, members and the institutions should be approved by the Exchange for relevant seats and the right to trade so as to become the Exchange trading participants. These trading participants shall conduct securities trading through the Participant Business Unit for which they have applied to the Exchange. These participant business units can be directly comparable to the stock brokers of NSE/BSE.  Thus, the world second largest exchange practices the order driven mechanism in executing the trades.There are two types of stocks being issued in the Shanghai Stock Exchange: "A" shares and "B" shares. A shares are priced in the local renminbi Yuan currency, while B shares are quoted in U.S. dollars. Initially, trading in A shares are restricted to domestic investors only while B shares are available to both domestic (since 2001) and foreign investors. However, after reforms were implemented in December 2002, foreign investors are now allowed (with limitations) to trade in A shares under the Qualified Foreign Institutional Investor (QFII) program which was officially launched in 2003. Currently, a total of 79 foreign institutional investors have been approved to buy and sell A shares under the QFII program. Quotas under the QFII program are currently US$30 billion. There has been a plan to eventually merge the two types of shares in the future.

Trading process and trading Hours: The Exchange is open for trading from Monday to Friday. In case of auction trading, the opening call auction runs from 9:15 to 9:25 on each trading day, while the continuous auction runs from 9:30 to11:30 and from 13:00 to 15:00.

Tick sizes: The tick size of the quotation price of an order for A shares, bond trading, and bond buyout repo trading is RMB 0.01 Yuan and that for mutual funds and warrants is RMB 0.001 Yuan, while that for B shares and bond collateral repo trading are USD 0.001 and RMB 0.005 Yuan respectively.

Circuit Breakers:
The exchange doesn’t have any market wide circuit breakers. However, the Exchange imposes the daily price limit on trading of stocks and mutual funds, with a daily price up/down limit of 10% for stocks and mutual funds and a daily price up/down limit of 5% for stocks under special treatment (ST shares or *ST shares).

The price limit is calculated as follows: price limit = previous closing price × (1± price up/down limit percentage) .

Type of Orders:

The Exchange accepts limit orders and market orders from members.

Market orders: The Exchange accepts the following types of market orders in line with market conditions:
(1) Five Best Orders Immediate or Cancel: an order that is executed in sequence against the current five best prices on the opposite side, with the portion of the order not executed, if any, cancelled automatically.
(2) Five Best Orders Immediate to Limit: an order that is executed in sequence against the current five best prices on the opposite side, with the portion of the order not executed, if any, changed to a limit order whose limit price is set at the last executed price on the same side. Such order, if not executed, is changed to a limit order with limit price set at the best quotation price on the same side, or, in the absence of any order on the same side, is cancelled.

Limit Order: A limit order shall include such information as securities account number, brokerage branch code, securities code, buy or sell, quantity, price, etc.

However, the maximum quantity of one order for stocks, mutual funds and warrants shall be not more than 1 million shares (units).

  1. Singapore Stock Exchange (SGX)

Asia-Pacific's first demutualised and integrated securities and derivatives exchange.

Some Statistics:

Number of firms listed: 774
Current Market Capitalization: SGD$650 billion.

Market Mechanism:

Trading Hours: Trading sessions are held daily from Mondays to Fridays between 9.00am – 12.30pm and 2.00pm - 5.00pm. In addition, there is an Pre-Open Routine (8.30am – 9.00am) and Pre-Close Routine (5.00pm – 5.06pm). There is no trading on Singapore public holidays. When a holiday falls on Sunday, the following Monday will be a public holiday.
Trading on the eves of Christmas, New Year and Chinese New Year will be from 9.00 a.m. to 12.30 p.m. The Opening Routine will be from 8.30 a.m. to 9.00 a.m. and the Closing Routine from 12.30 p.m. to 12.36 p.m.

Trading process and Tick sizes:
A tick size is the minimum incremental movement in the price of a stock. The minimum size of a tick is dependent on the current share price - see table below.
Share Price (S$)
Tick Size
1.00 – 3.00
3.00 – 5.00
5.00 – 10.00

Singapore stocks can only be traded in lots of 1,000.

Circuit Breakers:
There are no circuit breakers.

Type of Orders:

Only limit orders are permitted on the Singapore Stock Exchange.

A BUY limit order must be placed at the current offer price or down to a maximum of 6 ticks below the current offer price. If a BUY limit order is placed above the current offer price or greater than 6 ticks below the current offer price, the order will be rejected by the market/exchange.
A SELL limit order must be placed at the current bid price or up to a maximum of 6 ticks above the current bid price. If a SELL limit order is placed below the current bid price or greater than 6 ticks above the current bid price, the order will be rejected by the market/exchange.

  1. Tokyo Stock Exchange
The Tokyo Stock Exchange, or TSE, located in Tokyo, Japan, is the second largest stock exchange in the world by aggregate market capitalization of its listed companies, second only to the New York Stock Exchange.
Some Statistics:

Number of firms listed: 2,414
Current Market Capitalization: $4.3 trillion.

Market Mechanism:
There are three separate sections within the TSE market. The first, second sections, and Mothers (venture capital market). The first section is for the largest, most successful companies - often referred to as 'blue chips'. The second section is for smaller companies with lower trading volume levels. Mothers (market for the growth and emerging stocks), established in November 1999, and is for newer, innovative venture enterprises, both in Japan and overseas. And TSE market is a pure order-driven market without specialists or market makers to guide price formation.

Trading Hours: The exchange's normal trading sessions are from 09:00am to 11:00am and from 12:30pm to 3:00pm on all days of the week except Saturdays, Sundays and holidays declared by the Exchange in advance.
Trading uni: Currently the majority of domestic listed companies use a trading unit of 1,000 shares. Stocks' trading units are identified in newspapers' market pages. TSE is working to encourage listed companies with high prices and large trading units to reduce the size of their trading units to allow greater access to individual investors, who are currently put off by the expense involved in buying even one unit.
Circuit Breakers: To prevent such wild volatility TSE sets daily price limits for each stock, within the parameters of which stock prices may fluctuate safely.
Type of Orders: Basically there are two kinds of order available on the TSE equities market, 'limit' and 'market' orders.
Limit orders: The order refers to a buy or sell order with a limit price.
Market orders: An order to buy or sell at the best price currently available.
Order Priority Rules: During the trading process, priority among orders is decided on two principles; price and time priority, to ensure that all orders are handled equally and those transactions proceed smoothly.

  1. National Stock Exchange (NSE)

The National Stock Exchange of India Limited (NSE) is a Mumbai-based stock exchange. It is the largest stock exchange in India in terms of daily turnover and number of trades, for both equities and derivative trading. The NSE's key index is the S&P CNX Nifty, known as the Nifty, an index of fifty major stocks weighted by market capitalization.

Some Statistics:

Number of firms listed: 1454
Current Market Capitalization: US$ 1.46 trillion
Market Mechanism:
NSE operates on the 'National Exchange for Automated Trading' (NEAT) system, a fully automated screen based trading system, which adopts the principle of an order driven market.
Trading Hours: Trading takes place in the exchange on Monday to Friday everyweek. Market opens at 9.00 am and closes at 3.30 pm, during which trading takes place on continuous basis. Post trading session is held between 3.50 pm to 4.00 pm.
Tick sizes: Rs. 0.05.
Circuit Breakers: The index-based market-wide circuit breaker system applies at 3 stages of the index movement, either way viz. at 10%, 15% and 20%. These circuit breakers when triggered bring about a coordinated trading halt in all equity and equity derivative markets nationwide. The market-wide circuit breakers are triggered by movement of either the BSE Sensex or the NSE S&P CNX Nifty, whichever is breached earlier.

·        In case of a 10% movement of either of these indices, there would be a one-hour market halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m. there would be trading halt for ½ hour. In case movement takes place at or after 2:30 p.m. there will be no trading halt at the 10% level and market shall continue trading.

·        In case of a 15% movement of either index, there shall be a two-hour halt if the movement takes place before 1 p.m. If the 15% trigger is reached on or after 1:00p.m. but before 2:00 p.m., there shall be a one-hour halt. If the 15% trigger is reached on or after 2:00 p.m. the trading shall halt for remainder of the day.

·        In case of a 20% movement of the index, trading shall be halted for the remainder of the day.

NSE also has the price bands for the individual securities. They are
·        Daily price bands of 2% (either way)
·        Daily price bands of 5% (either way)
·        Daily price bands of 10% (either way)
·        No price bands are applicable on: scrips on which derivative products are available or scrips included in indices on which derivative products are available (unless otherwise specified)*
·        Price bands of 20% (either way) on all remaining scrips (including debentures, preference shares etc).

Type of Orders:

On NSE, a Trading Member can enter various types of orders depending upon his/her requirements. These conditions are broadly classified into three categories: time related conditions, price-related conditions and quantity related conditions.

Time Conditions

DAY - A Day order, as the name suggests, is an order which is valid for the day on which it is entered. If the order is not matched during the day, the order gets cancelled automatically at the end of the trading day.

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. The maximum number of days a GTC order can remain in the system is notified by the Exchange from time to time.

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. At the end of this period the order will get flushed from the system. The maximum number of days a GTD order can remain in the system is notified by the Exchange from time to time.

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 will be removed from the market. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately.

Price Conditions
Limit Price/Order – An order that allows the price to be specified while entering the order into the system.

Market Price/Order – An order to buy or sell securities at the best price obtainable at the time of entering the order.

Stop Loss (SL) Price/Order – The one that 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. Until then the order does not enter the market.

A sell order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or falls below the trigger price of the order. 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.

Quantity Conditions
Disclosed Quantity (DQ)- An order with a DQ condition allows the Trading Member to disclose only a part of the order quantity to the market. For example, an order of 1000 with a disclosed quantity condition of 200 will mean that 200 is displayed to the market at a time. After this is traded, another 200 is automatically released and so on till the full order is executed. The Exchange may set a minimum disclosed quantity criteria from time to time.

There are also Minimum Fill and All or None orders in the NSE constitution, but are not in the system as per SEBI directives.

Order Matching Mechanism: The best buy order is the order with the highest price and best sell order is the order with the lowest price. Order matching priority rule is Price, time and followed by volume.


The Bombay Stock Exchange Limited is the oldest stock exchange in Asia and has the greatest number of listed companies in the world. It is located at Dalal Street, Mumbai, India. It the largest stock exchange in South Asia and the 12th largest in the world.

Some Statistics:

Number of firms listed: 4700
Current Market Capitalization: US$ 1.79 trillion

Market Mechanism:
     BSE has introduced electronic trading system known as BOLT (BSE On Line Trading). With the following facility

1) This is an order driven facilitates efficient processing; automatic order matching and faster execution is enabled.

2) Trading system displays on continuous basis scrip and market-related information required supporting traders.

3) As soon as an order is matched, the confirmation of the trade is generated on-line.

4) The order matching logic is based on best price and time priority.

Trading Hours: Trading takes place in the exchange on Monday to Friday every week. Market opens at 9.00 am and closes at 3.30 pm, during which trading takes place on continuous basis. Post trading session is held between 3.50 pm to 4.05 pm.
Tick sizes: Rs. 0.01.

Circuit Breakers: In line with the SEBI regulation, market wide and scrip wise circuit breakers are similar to the National Stock Exchange of India. However, Circuit Filter of 20% is applicable on all scrips except the scrips on which derivative products are available and are part of indices on which derivative products are available.

Type of Orders:
There are various types of orders, which can be placed on the exchanges:

Limit Order: The order refers to a buy or sell order with a limit price.
Market Order: An order to buy or sell at the best price currently available.
Stop Loss Order: A stop loss order allows the trading member to place an order which gets activated only when the last traded price (LTP) of the Share is reached or crosses a threshold price called as the trigger price. The trigger price will be as on the price mark that you want it to be. There are stop loss buy as well as sell orders at the disposal of the traders.

Order Matching Rules: Matching of the orders will be in the priority of price and timestamp.

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