NATIONAL STOCK EXCHANGE OF INDIA –AN OVERVIEW

By Dr.B.J.Queensly Jeyanthi and Mrs.J.Mary Suganthi Bai

The past decade has been a golden age for securities market in India. It is now a

far more important source of finance than traditional financial intermediaries for

corporate sector. Indian market is now comparable to many developed markets in terms

of a number of parameters. The decade of the 1990’s witnessed emergence of the

securities market as a major source of finance for trade and industry. A growing number

of companies are accessing the securities market rather than depending on loans from

FIs/banks. The corporate sector is increasingly depending on external sources for meeting

its funding.

The National Stock Exchange (NSE) is India's leading stock exchange across the

country. NSE has played a catalytic role in reforming the Indian securities market in

terms of microstructure, market practices and trading volumes. The Exchange has

brought about unparalleled transparency, speed and efficiency, safety and market

integrity. It has set up facilities that serve as a model for the securities industry in terms

of systems, practices and procedures. In this article the functioning of NSE is analysed

from various selected indicators.

Market Segments and Products

NSE provides a trading platform for of all types of securities for investors under

one roof–The Exchange provides trading in 3 different segments viz., Wholesale Debt
Market (WDM) segment, Capital Market (CM) segment and the Futures & Options

(F&O) segment

The Wholesale Debt Market segment provides the trading platform for trading of

a wide range of debt securities which includes State and Central Government securities,

T-Bills, PSU Bonds, Corporate debentures, CPs, CDs etc. NSE constructed such an

index, the ‘NSE Government Securities Index’. This index provides a benchmark for

portfolio management by various investment managers and gilt funds.

The Capital Market segment offers a fully automated screen based trading

system, known as the National Exchange for Automated Trading (NEAT) system. This

operates on a price/ time priority basis and enables members from across the country to

trade with enormous ease and efficiency. Various types of securities e.g. equity shares,

warrants, debentures etc. are traded on this system.

Futures & Options segment of NSE provides trading in derivatives instruments

like Index Futures, Index Options, Stock Options, Stock Futures and Futures on interest

rates. Though only seven years into its operations, the futures and options segment of

NSE has made a mark for itself globally. In the Futures and Options segment, trading in

S&P CNX Nifty Index, CNX IT index, Bank Nifty Index, CNX Nifty Junior, CNX 100

index and 188 single stocks are available

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DERIVATIVES

Derivatives such as futures and options are financial contracts, which do not have

any intrinsic value, but their value is derived from underlying assets. A future contract

can be defined as “an agreement to buy or sell a standard quantity of a specific instrument

at a predetermined future date at a price agreed between the parties.” On 12 th June, 2000

trading in NSE’s Nifty and BSE’s Sensex index futures were commenced. Futures

trading in stocks were permitted in November, 2001. The Nifty Index future segment

recorded a cumulative volume of Rs.2.31 crore on the first day of derivatives. A

comparative study of the leading global markets shows that the average daily volume in

terms of a number of contracts traded on the NSE for stock futures for the month of

October, 2002 was the highest in the world, far ahead of MEFF (Spain) and (London).

The favourable performance of the index future puts thrust on the

NSE to introduce index option. Following the introduction of index future, NSE

commenced trading in European style cash settled S&P CNX Nifty Options on 4th June,

2001. In the first ten days of introduction of the index option, the market has well

accepted the product as evidenced by the growing interest. On an average, around 350

contracts were traded with open interest at around 975 contracts. Index options trading at

NSE accounted for 90% of the market share with widespread trading from Mumbai,

Calcutta, Delhi and various other centers.

Table: 1 –Contract specifications for Index options at NSE are as follows:

Particulars Specification

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Security Description N OPTIDX NIFTY
Style of options European
Underlying unit S&P CNX Nifty Index
Contract size 200 or multiples thereof
Price steps Re.0.05
Price Bands Not applicable
Expiration Months 3 near month contracts
Trading cycle A maximum of three month trading cycle – the near month
(one), the next month (two) and the far month (three). New
contract will be introduced on the next trading day following
the expiry of near month contract.
Last Trading/Expiration Day The last Thursday of the month or the preceding trading day,
if last Thursday is a holiday.
No.of Strikes 5 (two ‘in the money’,one at the money’and two ‘out of the
money)
Strike interval 20
Settlement In cash on T+1 basis
Final Settlement Price Index closing price on the last trading day.
Daily Settlement Price Closing of futures contract
Settlement Day Last trading day
Trading hours 9.55 am to 3.30 pm
Margins Upfront initial margin on daily basis
SOURCE: NSE News, May 2001, p. 32

DATA AND METHODOLOGY

Since NSE was established in the year 1994, data were taken 1994-2007. For

analyzing growth trend regression is used to estimate the linear growth, compound

growth, cubic growth and quadratic growth.

Growth trend is estimated with the help of the following formulas:

Linear Growth Y = b0 + (b1 * t).

Compound Growth Y = b0 * (b1**t)

Quadratic Growth Y = b0 + (b1 * t) + (b2 * t**2).

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 Cubic Growth Y = b0 + (b1 * t) + (b2 * t**2) + (b3 * t**3).

INTERNET TRADING

Technological change is a continuing and familiar feature of modern industrial

society. Internet is the outcome of technological change in the telecommunication and

computer technology and it brings a revolution in the world. Internet facilitates stock

market trading. NSE was the first exchange to grant permission to brokers to commence

internet based trading. Four members were granted permission to commence internet

trading on 31st March, 2000. Prior to internet trading, the capital market segment was

accessed from the computer terminals from the premises of brokers, but after the internet

trading it is accessed from the personal computers of investors through the internet and

from the hand held devices through WAP. Through internet trading orders originating

from the personal computers of investors are routed through the internet to the trading

terminals of the designated brokers, with whom they have relations and further to the

exchange. After these orders are matched, the transaction is executed and the investors

get the confirmation directly on their personal computers. Adoption of internet trading

systems has transformed the trading venues, market architecture and trading possibilities.

The growth of internet trade has been presented in the table 1and 2.

TABLE 2: GROWTH OF INTERNET TRADING

Capital market segment Futures & Options Segment

Trading % of Total Trading % of Total
Year volume trading volume trading
(Rs . crore) volume (Rs . crore) volume
2000-2001 7287.81 0.54 % -- --
2001-2002 8138.81 1.59 % -- --
2002-2003 15360.76 2.48 % 5148.96 1.42 %
2003-2004 37945.08 3.45 % 42990.50 2.02 %
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2004-2005 81033.81 7.11 % 105333.96 4.14 %
2005-2006 183428.5 11.68 % 428569.48 8.88 %
2006-2007 232859.90 11.97 % 922887.03 12.55 %
Source: Fact Book 2007

TABLE 3: GROWTH TREND IN INTERNET TRADING

Particulars Growth α β1 β2 R2
function
Capital market Linear -75272 39034 _____ .845
(-2.256) (5.232)
segment Compound 2805.809 1.921 ______ .974
(4.695) (20.995)
Futures and Linear -365330.55 222105.512 _____ .828
(-1.880) (3.807)
Options segment Compound 2194.3909 3.5526 ______ .969
(2.336) (7.748)
Quadratic 221591.49 -280970.52 83846.005 .993
(2.412) (-4.014) (7.325)
t values are insignificant at 5% level. Figures in the parenthesis are t value.

The internet trading volume has increased in the capital market and futures
and options segment. Capital market segment has experienced both linear and
compound growth trend. Futures and options market segment experienced linear,
compound and quadratic growth trend.

MARKET CAPITALISATION

Market capitalization is a measurement of corporate or economic size equal to

the share price times the number of shares outstanding of a public company. As owning

stock represents owning the company including all its assets capitalization could

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represent the public opinion of a company’s net worth and is a determining factor in

stock valuation. Table 4 shows the market capitalization of both capital market segment

and wholesale debt market segment.

TABLE 4:

Market Capitalization
Year CM Segment WDM Segment
Rs.Crore Rs.Crore
1994-1995 36335.00 158181
1995-1996 401459.00 207783
1996-1997 4193670.00 292772
1997-1998 4815030.00 343191
1998-1999 411470
4911751.00
1999-2000 10204257.00 494033

2000-2001 6578470.00 580836

2001-2002 6368610.00 756794

2002-2003 5371332.00 864481

2003-2004 11209760.00 1215864

2004-2005 15855853.00 1461734

2005-2006 1567574
2813201.00
2006-2007 3367350.00 1784801

Source: Fact Book 2007

TABLE 5: GROWTH TREND IN MARKET CAPITALISATION

Particulars Growth α β β1 R2
function
Capital Quadratic -344226 2900501 -169909 .597
(-1.081) (2.551) (-2.150)
Market
Compound 597326 1.2767 ____ .344
Segment (1.240) (9.843)

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Whole Sale Linear -144222.80 129299.82 ____ .920
(-1.628) (10.740)
Debt Market
Compound 141811.21 1.230674 ____ .992
(23.935) (176.157)
t values are insignificant at 5% level. Figures in the parenthesis are t value

The market capitalization of the capital market segment is fluctuating. There has
been an increase in market capitalization from the year 1994 – 1995 to 1999 - 2000. But
it decreased from 2000 – 2001 to 2002 – 2003.From the year 2003-2004 it picked up
steadily. The market capitalization in the capital market segment has exhibited quadratic
growth and compound growth. But in the case of wholesale debt market, the market
capitalization is increasing year by year and it exhibited linear and compound growth
trend.

TRADING VALUE

Trading value is a key element to measure supply and demand and often the

primary indicator of a new price trend. When a stock moves up in price on unusually high

volumes it could indicate that investors are accumulating the stock. When a stock moves

down in price on unusually heavy volume, major selling could be the reason.

TABLE 6: BUSINESS GROWTH OF NSE

Capital Market Wholesale Debt Futures &Options

Segment Market Segment Segment
Year Trading Average Trading Average Trading Average
value daily value daily value daily
(Rs.cr) trading (Rs.cr) trading (Rs.cr) trading
value value value
(Rs.cr) (Rs.cr) (Rs.cr)
1994-1995 1805 17 6781 30 --- ---
1995-1996 67287 276 11868 41 --- ---

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1996-1997 294503 1176 42278 145 --- ---
1997-1998 370193 1520 111263 385 --- ---
1998-1999 414474 1651 105469 365 --- ---
1999-2000 839052 3303 304216 1035 --- ---
2000-2001 1339510 5337 428582 1483 2365 12
2001-2002 513167 2078 947190 3277 101927 413
2002-2003 617989 2462 1068701 3598 439864 1752
2003-2004 1099534 4329 1316096 4477 2130649 8388
2004-2005 1140072 4506 887294 3028 2547053 10067
2005-2006 1569558 6253 475523 1755 4824250 19220
2006-2007 1945287 7812 219106 898 7356271 29543

Source: Fact Book 2007.

TABLE 7: BUSINESS GROWTH TREND OF NSE

Particulars Growth α β1 R2
function
Capital Linear -169185.7 136393.9 .791
(-1.010) (6.463)
market
Compound 31098.378 1.442105 .592
Segment (1.375) (10.915)
Wholesale Linear -50288.1 72286.95 .390
(-.233) (2.655)
debt Market Compound 16322.46 1.426572 .654
(1.618) (12.845)
Futures and Linear -2315882 1200484. .889
(-2.739) (6.350)
Options Compound 4721.555 3.3198 .836
(.942) (4.215)
market
t values are insignificant at 5% level. Figures in the parenthesis are t value
segment
The trading value in the capital market segment has increased from 1994 to 2001 and it

decreased in the year 2001-2002 afterwards it increased steadily. THERE was steady

growth in the futures and options segment. Trading value in the whole sale debt market

segment was fluctuating but it decreased from the year 2004 to 2007. The entire market

segment have exhibited both linear and compound growth trend.

CONCLUSION

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 NSE has remained in the forefront of modernization of India's capital and

financial markets. The NSE has changed the face of securities market in India. It has

introduced internet trading and brought tremendous changes in its operations. Among the

entire segments derivatives segment is improving high thought it is introduced only in the

2000 afterwards.

REFERENCES

Sudhakar A.and S.V.Ramana Rao, “Financial derivatives in India:Issues and

Challenges”, Southern economist, February 15, 2004, pp 11.

Unnikrishnan K.P, “Derivatives: the Other Side” Seethapathi .k . The New

World of Derivatives. The ICFAI University Press. 2005 , p. 21.

S&P CNX S&P CNX Nifty Index futures market commences on NSE, NSE
News, June, 2000, p. 3.

Priya Angel “Currency Options: an effective Hedging Tool’, The New World of
Derivatives . The ICFAI University Press pp43

Sundararaman , “Options trading at NSE”,.NSE News , May 2001, p .21.

NSE News, May 2001, p. 32

It helps the investors to leverage their positions in the market. Trading in the futures

markets offers the opportunity to profit from any potential economic scenario provided if

one picks up the securities correctly, whether there is inflation or deflation, boom or

depression, droughts and famines there is always the potential for profit making

opportunities. Future markets are more liquid.

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 OPTIONS

An option is a contract that gives the buyer(the holder of the option the right but not an

obligation to buy or sell the underlying asset from the seller(writer of the option), at a

specified price on or before a predetermined date. There are two types of options namely

Call Option and Put Option. Call option gives the buyer the right to buy an underlying

asset at a predetermined price on or before a specified date. Put option gives the buyer the

right to sell the underlying asset at a predetermined price on or before a specified date.

The American style Options are exercised at any time prior to their expiration In the

European style option contracts are exercised only during a specified period before the

option expires. Generally they are exercisable on the expiration date.

Assets 1999- 2000- 2001- 2002- 2003-04 2004-05 2005 2006-

00 01 02 03 -06 07
Fixed assets 29,067 35,639 37,995 34,676 33,129 30895
Investments
21,290 29,390 27,688 27,782 24,408 19194
Current Assets
17,152 23,041 25,362 31,261 48162.2 88075
Loans & Advances 8

4,392 4,418 3,550 3,488 2443

Misc.Expenses 4129
141 18 10 6 4
5
Total 92,507 94,605 97,213 140611
109834

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Liabilities 1999- 2000- 2001- 2002- 2003- 2004 2005- 2006-
00 01 02 03 04 -05 06 07
Capital 4,500 4,500 4,500 4,500 4500 4500 4500 4500

Reserves 12,074 17,344 20,102 22,457 30,888 44,300

Unsecured 48,310 62,002 62,607 62,143 61,724 6,49,44

Deposits

Liabilities 7,158 8,660 7,396 8,113 13,222 26867

and
provisions

72,041 92,507 94,605 97,213 109834 140611

Total

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