How can a person buy or sell shares on the stock exchange?
Say you are interested in buying shares in Company A whose shares are traded on
the exchange. You contact one of the Brokers of your choice. The Broker may
require you to set up an account with them. Once you have an account, you
indicate that you wish to trade by placing an order. This may be by simply
calling your Broker and placing your order over the phone. However, typically a
Broker will require that you deposit the consideration for the shares (if
buying) or lodge the share certificate (if selling) before they will deal on
your behalf. The Broker then records your order on their order log which
contains details of the order such as your name, order reference, date, time the
order was made, quantity, status (buy or sell) and price.
Limit Orders and Discretionary Orders
When placing an order a customer can either specify a price limit or give the
Broker discretion. “Limit orders” are orders received by the Brokers with a
determined price specified by the customer; for a buy order the Broker cannot
go above the stipulated price specified by the customer and for a sell order he
cannot go below.
How do the Brokers determine which orders should be dealt with first
Orders must be dealt with based on price and time priority. Time priority is
determined by the sequence in which the Broker receives the orders from their
customers. The Broker ensures the sequence is adhered to through recording the
orders as they arrive in their order log. Price Priority is determined in
descending order of price for bids (order to buy) and ascending order of price
for offers (orders to sell).
Who is involved in trading sessions on the exchange?
On the exchange the Market Official is responsible for supervising the
activities on the Trading floor and to open the trading session that will
facilitate trading to take place between the Brokers representing the interest
of the customers on the floor.
Single Price Auction
If it is difficult to fairly allocate orders by time priority eg if there is a
large build up of orders prior to the trading session the Board may invoke a
Single Price Auction. The Market Official will run a Single Price Auction before
on-floor trading commences.
How are orders dealt with in on-floor trading?
Orders are exposed to other Brokers via the limit order book display which is
also based on price and time priority. Time priority between Brokers is
determined by the sequence in which the Brokers enter their orders onto the
system ie the first Broker to enter an order at a particular price has priority
at that price. Price Priority is determined in descending order of price for
bids and ascending order of price for offers.
On-floor trading on the exchange
For trading to begin the Market Official must open the session to allow access
by the Brokers to commence trading on the exchange. Once the session is open the
Brokers can view the orders of the other Brokers. Where there are orders that
can be matched against other Brokers orders the Brokers will deal with each
Settlement of trades
Prior to the opening of the exchange transactions in securities were exclusively “client side” between investors; settlement between investors, mediated through Brokers and registrars, now that the stock exchange has begun its operations there will be transactions between members of the market and settlement will be between members of the market, “market side” settlement.
Client side settlement
Without a stock exchange settlement of transactions is either between Brokers
and investors or between investors themselves with the assistance of the company
secretaries or registrars. The Broker or registrar typically acts for both
buyers and sellers. They collect the stock from the selling investor and pass it
with a transfer form with details of both buyer and seller to the company
registrar for deletion of the seller’s holding from the shareholders list, for
entry of the buyer’s holding on the list and for issuance of a new certificate
to the buyer. Payment arrangements are at the discretion of the Broker or
registrar: typically money would be collected from the buyer in advance and a
stock certificate with a transfer form would be obtained from a seller either
(a) after the Broker has matched a buyer’s order with the seller or (b) on
delivery of the new stock certificate by the registrar.
Stock markets cannot rely on client side settlement alone because it’s too slow
and investors who trade in a stock market would want to be able to sell stock
that they would have bought without delay, without having to wait for
certificates to be delivered.