Page 3 - Lesson Note 3

Trading in securities is now executed through an on-line, screen-based electronic trading

system. Simply put, all buying and selling of shares and debentures are done through a

computer terminal. There was a time when in the open outcry system, securities were bought

and sold on the floor of the stock exchange.

Under this auction system, deals were struck among brokers, prices were shouted out and the
shares sold to the highest bidder. However, now almost all exchanges have gone electronic and

trading is done in the broker’s office through a computer terminal.

A stock exchange has its main computer system with many terminals spread across the

country. Trading in securities is done through brokers who are members of the stock exchange.
Trading has shifted from the stock market floor to the brokers’ office.

Every broker has to have access to a computer terminal that is connected to the main stock

exchange. In this screen-based trading, a member logs on to the site and any information about

the shares (company, member, etc.) he wishes to buy or sell and the price is fed into the

computer. The software is so designed that the transaction will be executed when a matching

order is found from a counter party.

The whole transaction is carried on the computer screen with both the parties being able to
see the prices of all shares going up and down at all times during the time that business is

transacted and during business hours of the stock exchange.

The computer in the brokers’ office is constantly matching the orders at the best bid and offer

price. Those that are not matched remain on the screen and are open for future matching
during the day.

Electronic trading systems or screen-based trading has certain advantages:

1. It ensures transparency as it allows participants to see the prices of all securities in the

market while business is being transacted. They are able to see the full market during real time.

2. It increases efficiency of information being passed on, thus helping in fixing prices efficiently.