Table of Contents
Introduction
The Brokers are the vital entity for trading in the market. They often provide liquidity to the securities traded in the market. They are the people who help the investors to buy and sell securities on Exchange. They take credit risk of the investors. for these services they charge nominal commission from the investors. Whether the investors buy or sell the securities, the broker facilitates this trade for a consideration called commission. Besides, trading, the broker also carry out a substantial trading on their own which is known as proprietary trading.
The broker plays very important role in making market efficient by brining investors for buying and selling together. Often, the broker also help by explaining the investors and recommends them about buying and/or selling scrip, there by resolving asymmetry of information to that extent and contribute in marketing efficiency.
History And Evaluation
India has one of the oldest stock market in Asia. We have had an active stock market for over 150 years now which has contributed significantly to entrepreneurship and industrial growth. It is the brokerage community that has intermediated between the industry and the investors.
The roots of the stock market in India began in the 1860s during the American Civil War. There was a sudden surge in the demand for cotton from India resulting in setting up of a number of joint stock companies that issued securities to raise finance. This trend was similar to the rapid growth of securities markets in Europe and the North America in the background of expansion of railroads and exploration of natural resources and land development.
Historical records show that as early as 1864, there were about 1000 brokers with the stock markets functioning from three place in Mumbai:
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- At the junction of Meadows Street, between 9 am to 7 pm.
- At Rampart Row, from day break till 9 am.
- At Bazar-gate, from 7 pm to early hours of next morning.
Following the establishment of the first stock exchange in Mumbai, other stock exchanges came into being in major cities in India, namely; Ahmedabad [1894], Calcutta [1908], Madras [1937], Uttar Pradesh and Nagpur [1940] and Hyderabad [1994]. The stock markets gained from growth in several industries such as jute, coal tea at various points of time.
A new phase in the Indian stock markets began in the 1970s, with the introduction of Foreign Exchange Regulations Act [FERA] that lead to divestment of foreign equity by the multinational companies. This created a surge in retail investing. The early 80’s witnessed another upswing in stock market when companies such as Reliance Industries accessed equity markets for resource mobilization which saw a huge interest from retail investors.
By 1990, the Indian Government realized the need for a robust capital for effective and efficient mobilization of resources and its allocation in the economy. Also, incidences of market abuse in the securities and banking markets let the government to set up ‘The Securities and Exchange of Board of India’ [SEBI] in 1988 and was conferred with statutory powers under the SEBI Act, 1992.
With the setting up of the National Stock Exchange, Indian capital markets saw several innovations and modern practices and procedures such as nationwide trading network, electronic trading, greater transparency in price discovery and process driven operations that had significant bearing on further growth of the stock markets in India.
Stock markets have today become intensely technology and process driven, giving little scope for manual intervention, which was a source of market abuse in the past. Electronic trading, digital certification, straight through processing, electronic contract notes, online broking have emerged as major trends in technology.
Risk management became robust reducing the recurrence of payment defaults. Product expansion took place in a speedy manner. Indian equity markets now offer, in addition to trading in equities, opportunities in trading of derivatives in futures and options in index as well as stocks.
Within five years of introduction of derivatives, Indian stock markets now are ranked first in stock futures and fourth in index futures. Indian stock markets are transaction intensive and thus rank among the top five markets in this regard.
With the Indian stock markets now reaching global standards, the role of brokerage firms is also becoming more and more important with them offering a gamut of products under one basket.
Indian securities market is fairly large as compared to several other emerging markets. There are 22 stock exchanges in the country. However the entire liquidity is shared between the country’s national level exchanges.
Major Aspects Of The Indian Capital Market Over The Years Are As Follows:
1- Market Capitalization: Market capitalization of stocks in India rose from Rs 67.50 bn in 1980 to Rs 705.21 bn in 1990 to Rs 11,926.30 bn in 2000. Market capitalization on NSE for 2009-10 was Rs. 6,009,173 crores at the end of period while it was Rs. 6,117,858 crores at the end of April 2010.
2- Equity Issuance: Resources mobilized from the primary markets in India during 2008-09 were Rs. 16,220 crores. The issue size has greatly increased in the last few years and so has the extent of the premium.
3- Trading Volumes: Secondary market operations gained greater momentum in the last decade. In the last ten years, the volume of trading in both NSE and BSE rose many times making the Indian stock markets, the leading market in the Asian region, and is also remarkable as compared to the growth in the world equity markets. A major development in Indian equity markets is the dematerialization of shares which led to speedy securities settlement.
The number of brokers and all the other market intermediaries grew over the period of time, which can be seen from the tables ahead.
Key factors to drive growth and success in the broking industry would be distribution networks, diversification of services, expertise and research, transparency and disclosure, compliance and market integrity.
Role Of Brokers
A broker is a financial intermediary which interfaces with the investors to buy or sell securities on behalf of them and charges some percentage of the settlement amount for doing so. A brokerage firm can also buy/sell securities for its own firm.
A trading member is a firm which is a member of an Exchange and is authorized to trade in the capital market system.
Investor has to open an account with a brokerage firm buy/sell securities. It accepts orders from the registered investors with the firm, validates the orders [with the help of its own software] and routes them to the exchange.
Once the orders have been traded, it sends back the order confirmation to the investors. A brokerage firm is also responsible for delivering funds/securities to the investors once the trade has been settled.
Traditionally a brokerage house was only involved in trading, but today functioning of the brokerage firms has transformed from being a family run business to that of professional organized entities that lay greater emphasis on observance of market principles and best practices. With proliferation on new markets and products, corporate nature of the memberships is enabling broking firms to expand the realm of their operations into other exchanges as also other product offerings. Memberships range from cash market to derivatives to commodities and a few broking firms are making forays into obtaining memberships in exchanges outside the country, subject to their availability and eligibility.
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