FAQ

Mon, Apr 25, 2011 12:00 AM on Others, Others,

Nature of Trading System in Nepse


NEPSE the only Stock Exchange in Nepal has replaced the open cry trading system with fully automated screen based trading since 24th August, 2007 under the CFG project of Government of Nepal aided by Asian Development Bank.

The NEPSE trading system is called ‘NEPSE Automated Trading System ‘(NATS) is a fully automated screen based trading system, which adopts the principle of an order driven market.

According to this system, when there are two orders placed for a security in the market, the system matches the best buy order with the best sell order. An order may match partially with another order producing multiple trades.

For order matching the best buy order is the one with the highest price and the best sell order is the one with the lowest price. This is because the system views all buy orders available from the point of view of the sellers and all sell orders from the point of view of the buyers in the market.

So, of all buy orders available in the market at any point of time, a seller would obviously like to sell at the highest possible buy price that is offered. Hence, the best buy order is the order with the highest price and the best sell order is the order with the lowest price.


What one should do to place order through this system?


One should first be registered in this system, to do so one need to go to broker. Then the broker through Client Management service provided in the system register the interested party as a client. Without creating a client the broker will not be allowed to place order for that particular client. The broker has to insert various details of the client out of which client code is a unique code for that particular client for a particular broker. After a broker receives the order the broker has to place order for that client on FIFO basis of the order registered by the client’s in the broker’s office.

What is Order and how it is placed?


Order is an expression of interest to either buy or sell a specified quantity of stock either at a specified price or at the current market price. To make any buying and selling activities of the securities in the secondary market, the investors must go through the channel of Brokers as per the Securities Exchange Act of 1983; this act also prohibited these brokers to make transactions without getting orders from their clients.

So before an investors wants to involve in the activities of buying and selling of securities, s/he first need to register in the broker terminal as a client for which certain information and documents need to be provided to broker through which client code, unique code of the particular client for a particular broker, is generated.

After registering, in future date if a broker receives the order then the broker has to place order for that client on FIFO basis of the order registered by the client’s in the broker’s office. The orders can be Buy or Sell order.

  • Buy Order

It is the order placed by buying brokers to purchase the securities on behalf of his clients/investors. In this order, s/he has to mention clearly the name of the companies, the number of securities that s/he wants to buy and the validity of the orders. If the validity period of the order is not mentioned, it will be valid for only 15 days.

  • Sell Order

It is the order placed by the selling client to the broker to execute the transactions. In this order too, the client has to mention the name of the company, number of securities, prices of the securities that s/he wants to sell for and the validity period of the orders. If the validity period of the order is not mentioned, it will be valid for only 15 days.

It should be noted that all the required information either for buying or for selling of a stock should be submitted by the broker.

Generally four types of order can be placed in the system

Regular: An order which is completed on the exchange and that confirms the order of lot size of greater than that.

Odd- Lot: An order which is completed on the exchange and that confirms the order less than lot size.

Manual: An order which is placed by the brokers and is reported individually by the buying and selling brokers.

Block: An order which is placed by the brokers and confirms to the minimum block trade quantity specified by the exchange and is reported individually by the buying and selling brokers.

Generally an investor can mention the price in 3 ways in his/her orders:

Fixed-Price:


In this the investors can state the fixed price for the purchase and sell of the securities in which the brokers are not allowed to execute at higher and lower than the stated price.

Range:


In this investors can quote the price in range where they give certain liberty to his/her brokers to negotiate and execute the transactions on his/her behalf. S/he can also quote the maximum and minimum price for buying or selling shares in order to maximize gain or minimize loss because of intra-day price fluctuations.

Open Price


In this the investors don’t state any price level but solely leave it to the brokers to execute the transactions at the appropriate price or the market price. In this situation, the investors must have full trust with the brokers.

When does the Order  Execute?


There are three phases during which the broker can place the order to execute the transactions. Such phases are:


At the Open (ATO):


ATO indicates the order should be executed when the market opens. In order to execute the transactions at ATO the member brokers have to place the orders to execute it at ATO. All the ATO orders will be accumulated in the system till ATO execution time and after the time reaches the ATO orders will be executed at the best price at the opening of transactions.

ATO gives the price, quantity and time priority for the execution. At the present Nepse has set 11:30 A.M. to 11:55 A.M. during which brokers can place ATO orders. The engine calculates the best price and matches the order at 12:00 noon i.e. when market opens. In this case price can be quoted within the range of 5 percent of previous close price. Once the ATO phase is over price can be quoted within the range of 2 percent of LTP. ATO determines the opening price of the stock. If there is no matchavailable for ATO orders of a stock, then the open price of the stock will be equal to the previous close price.

Continuous Trading:


This is the phase that indicates the orders should be executed while the market in progress.

At the Close (ATC):


This is the last phase that indicates the order should be executed when the market closes. The system has provided facility to generate the ATC price of a stock either by taking the average of the price of last n transactions or the average of the price of the last n minutes.

Currently Nepse adopts the average of last n transactions where n equals to 1 i.e. the LTP of the stock at close is the ATC price of closing price.

ORDER LIFE


Customer can give order to retain until the specified period as below unless it is executed.

End of Day (EOD): This indicates the placed orders if not executed will be retained until end of today.

Good Till Cancel (GTC): This indicates the order if not executed should be retained unit it is cancelled. The system has provided facility for exchange to set the time period in days till which the pending orders can be retained in GTC.

Nepse has adopted order driven market system. So each and every order entered should be backed by written order. In those orders the clients must specify the validity period of the orders but if they do not mention the time period the order will be valid for 15 days. In this case GTC will be 15 days.

Conditions for execution of Order


One can specifies the conditions under which the order could be executed. The conditions are as below:

None:


This indicates there are no conditions for execution of orders.

Immediate or Cancel (IOC):


This condition indicates that the orders should be executed in full or part immediately if not execute immediately the unexecuted order will not be sent to Public order book but cancelled immediately by the system.

 Fill or Kill (FOK):           


This condition indicates the order must get executed entirely or cancelled immediately. The unexecuted order is not sent to public order book but killed (cancelled) by the immediately. Nepse has modified the system allowing entering the quantity of a stock to be traded either at the multiple of lot size or greater than that.

All or None (AON):


This condition indicates the order must get executed entirely and if not executed the order is sent to public order book. In this condition too, Nepse has modified the system allowing entering the quantity of a stock to be traded either at the multiple of lot size of greater than that.

Settlement Process In Nepse


Under ATS (Automated Trading System), the broker has to fill up all the required information of his/her clients within the system after the transaction takes place.

NEPSE has adopted a T+3 (after 3 days of Trading day) settlement system. Settlement will be carried out on the basis of paper versus payment.

  • “T”: The trading is done
  • “T+1”: The buying brokers have to submit bank vouchers for settlement with covering letter
  • “T+2”: The selling brokers must submit share certificate with covering letter
  • “T+3”: NEPSE prepares billing for payment and this will be forwarded to the bank

For the PAPER, T+3 settlements system is adopted.
For the PAYMENT, T+2 settlements system is adopted.

  • “T+5”: Once the settlement is done, the buying brokers, after consultation with the clients, must decide and present the purchased shares if they want to record it as Blank Transfer. This must be completed within T+5.

And if buying clients do not want to record for blank transfer, the shares should be forwarded for Name Transfer.

NOTE:


Blank Transfer is done to sell the shares immediately (within 15 days of buying). Generally  Name Transfer takes 15 days to 30 days and at times, even more than 30 days (depends on the efficiency of concerned company). Hence, Blank Transfer is done to take advantage from short-term volatility of market price.


What is Blank Transfer?


BT is simply a system of not sending the bought share certificate for name transfer in the company but only recording in the system of Nepse. This mechanism is mainly opted to grab the opportunity provided through the market volatility. As the Name transfer is lengthy process, those who choose to make short term investment prefer to go for BT.

But presently, brokers must complete the BT process within T+5. The transactions that executed can be recorded in different way and Nepse has considered all possible retention. The followings are the major key points to be considered.

  • This is related only with buy of the securities.
  • The buyer may decide to have market benefit either to have capital gains or to minimize the loss.
  • In order to do this s/he may partly send for name transfer or may register it in blank transfer.
  • If investors register total purchase in blank transfer then they can put share for sale at any time. But in the future date, the investors opt to go for name transfer after registering in the BT; s/he can do so by cancelling the BT and forwarding the shares to the concerned company for name transfer.


What is Block Trading?


It is a provision provided by the Nepse in which the shares transactions of large volume are traded in separate manual trading window. This transaction will not take place in the regular trading system, a separate window for trading is provided to the parties.

According to the trading guidelines, if the trading units are of 10,000 units or more than that the investors can opt for block trading provision. However, it is not compulsion for parties to do so. This provision is practiced for both promoter and ordinary scrips in the market. Apart from it, if two parties i.e. buying and selling, with their mutual understanding agreed to traded the shares in certain price, then the parties can approach the exchange for block trading also.

Next Page | Last Page