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and industry of any country. They are the intermediaries who move the savings from households into the main stream industry on one hand and on the other makes a common man part owner of big companies of the country and the world. Since the inception of stock markets which dates back to 1875 when “Native Share and Stock Broker’s Association”, India’s first share trading association was formed which later came to be known as Bombay Stock Exchange (BSE). It was created with just 318 members. Since then, stock exchanges and trading have gone through a lot of changes. If we see the broadest bifurcation of stock market generations, then it can be broken down into three major generations. The first was the era of ring trading, followed by the transformation period from ring trading to online trading based on sentiments and run by major few, and the latest which is even more neutral and runs on artificial intelligence (AI) algorithms.
2.2 Ring Trading
Traditionally, rather I should say historically trading in the stock market used to happen in the trading ring which was physical areas in stock exchanges where the stock brokers used to stand and trade stock by open outcry. To understand it better, a ring is a location on the floor of a stock exchange where trades were executed in old times before internet came in our lives. Few renowned brokers used to enter the ring and shout out the orders placed by their clients; these were then sent to the record keeper of trades who would also keep a track of lowest and highest prices of each stock. Since the whole process used to be done manually, there was less efficiency and a lot of confusion as well [1].
2.3 Features of Generation 1: Ring Trading
1 1. Complete Human Interaction: Back in the days of ring trading, no technology was used and the whole system worked manually. There were no computers to store the data, no internet to circulate the information to the places, so everything was managed by a few people who were closely associated with the stock markets of that time.
2 2. Low Volume: Since a lot of information flow and also awareness about the businesses and their stock was not there, so stock trading did not used to happen at grass root level. It was only limited to a few people who knew big business houses or their associates or the ones who had good financial background who were approached by the brokers.
3 3. Less Transparency: Since there was no centralization and everything used to happen with hand by a few people, also with less information flow, the mechanism was not very transparent [4]. Clients had to trust the brokers for information and also regarding the prices of the shares they traded in.
4 4. No Authenticated Trade Verification: If we compare it with current times when at the end of every day broker has to confirm the trade personally to the client and which is also intimated to him by SEBI and his DP at the times of ring trading, then no such authentication used to take place at broker and client end which at many times resulted in defaults.
5 5. Physical Exchange of Share Certificates and Money: Share certificates existed in physical form in hard copy, had to be sealed with company stamp, and had to be posted from one owner to another in case of a trade. Same was the case with money; it actually changed hands between clients, brokers, stock exchanges, etc. [2]. So, the whole process was very lengthy and time taking which also resulted in loss and theft of share certificates and money.
6 6. Localized Functioning of Exchanges: There were a lot of stock exchanges; literally, at all centers of trade, otherwise people of that city could not trade efficiently. Companies had to be listed on each stock exchange to create volume and presence at all places. It all gave rise to complexities and also gave way for scams and frauds.
7 7. No Participation of Tiers II & III and Rural India: Since information flow was very less, so people in smaller cities and towns had no idea about the working of stock exchanges. They either thought of it as a place of making big money or a hoax to lose money. So, the actual participation was not there by the people of smaller places.
8 8. Long Trading Cycles: Today, a trade squares up in T+2 days that means that with 3 working days after a trade has been executed, the seller gets the money in his account and shares from his DP are transferred to the buyers account, and at buyers end, he gets the shares in his DP and money from his account gets deducted. This all happens in 2 days, but back in ring trading days, all took T+5 days at least, actual receiving of share certificates may have taken even longer than that.
2.4 Generation 2: Shifting to Online Platform
This was the era of big transformation in stock broking. All the systems which used to happen manually were shifted to computers and online trading was started [3]. Online trading replaced ring-based trading and made physical stock exchanges less important in stock trading since it made share trading possible from any place anywhere. Online share trading was initiated in India in the year 2000 by NSE (National Stock Exchange) after getting the sanction from regulatory authority the Securities and Exchange Board of India (SEBI). Online trading was proposed in a committee set up by SEBI on Internet Trading and services and was approved in January 2000. This transformation from manual to computer-based trading gave way for more transparent execution of working of stock exchanges [5]. It also augmented the speed at which trades were executed and completed. It also induced convenience and security in share trading for investors. This simplicity and a sense of security made more and more people to participate in stock broking which led to a tremendous growth in retail participation [6]. There were few major changes that appeared in this age which are as follows:
1 1. Only Two Stock Exchanges Prevailed: We discussed earlier that almost every major city of India had a stock exchange of its own and companies were listed on them. By 1990s, there were 24 stock exchanges in India in all major cities. But when everything shifted online the physical exchanges became just buildings as the broking was consolidated and all the companies listed themselves only on two major exchanges, namely, BSE and NSE. The sensitivity index on stock markets is the barometer of the stocks, low and high cumulative of major stocks listed on that exchanges. BSE has SENSEX with 30 stocks and NSE has NIFTY with 50 stocks. It was in January 1986 that BSE’s sensitivity index SENSEX was launched. It was the first stock market index which came into being. Its base year was set as 1978–1979. The underlying principle for selecting companies that would go in SENSEX or NIFTY are trading frequency, market capitalization, trading history, listing history, and industry representation. In March 1995, BSE ended its 120 years history of floor trading and shifted to computerized trading operations and then began the screen-based trading system nationwide. NSE came into force in November 1992. It was set up to accommodate to medium sized companies. In June 1994, NSE commenced operation in wholesale debt market segment. In November 1994, NSE shifted to screen-based trading format for the first time in India. Sensitivity index of NSE, NIFTY, was created in April 1996. It consists of top 50 scripts with highest market capitalization and it is an indicator of all the major companies in the NSE. NSE also has NIBIS (NSE’s Internet-Based Information System) for online real-time diffusion of trading related information on the Internet.
2 2. Online Trading Software: The biggest challenge in online trading was to make it error free, transparent, and easily accessible. For this purpose, NSE was the primary stock exchange in India which started providing pan India screen-based, order-driven, trading system. The trading system at NSE is known as the National Exchange for Automated Trading (NEAT) system. It is an online, fully computerized, nameless, order-driven system with nationwide presence. Another package offered by NSE is “NEAT Plus”. Neat Plus provides a novel service to the subscribers which makes them trade in more than one stock exchange simultaneously. To ensure that that the system does not collapse due to over burden, NSE undertakes periodic testing and capacity enhancements as soon as its users and trading volume increases. NEAT also provides realtime data sharing on trading volumes and thus traders and investors can factor in the second to second changes in their Trades. BSE also has a system just like NEAT which is called as BOLT. BSE Online Trading (BOLT) is also a computerized, screen-based trading platform which can be used to punch in orders from anywhere, anytime