COLUMNISTS
STOCKS
MUTUAL FUNDS
NRI TAX
INDIAN TAX
INTERVIEW
PERSONAL FINANCE
PERSONAL BANKING
INSURANCE
REAL ESTATE
GOLD
CURRENCY

All about Internet broking

Murali Iyer

What is common to Sunidhi Consultants, Motilal Oswal Securities, Geojit Securities, SSKI, KBS Caps, Khandwala Securities, ICICI Securities, IL&FS, Infinity.com and esharebazaar.indiainfo.com? All these are getting into e-broking or Internet broking. And one can expect this list to grow. These are the Indian equivalents to respected broking websites like E-Trade, Wallstreet.com, Charles Schwab, America-iNvest.com, Zacks and others of their ilk.

Availability of state-of-the-art software that provides a vast variety of options for Internet connectivity and electronic trading of shares on real-time market information is a necessity here. A software - net.net - is awaiting clearance from the regulatory authorities, BSE and NSE for implementation with retail and institutional investors, and also with brokers.

This will facilitate e-broking via Internet at a very low cost. Meanwhile, NSE.IT (a subsidiary of NSE) has unveiled two products - NeatXS and NeatIXS. NeatXS will enable multi-exchange order execution along with risk management, while NeatIXS will allow Internet trading.

What is Internet trading?
Sebi has recently allowed Internet trading in a limited form. Gradually, a more comprehensive form of Internet trading is likely to be introduced in India. In Internet trading, the Net would be used as a medium to communicate orders to the stock exchange through the broker's website. A lot of existing sites like bseindia.com, nseindia.com, rediff.com, indiainfoline.com, capitalmarket.com and motilaloswal.com serve a variety of functions like providing real-time quotes with information and analysis of data on companies and industries.

But e-broking sites would also provide the client with the opportunity to buy and sell securities from the confines of one's home or office. The difference here (from conventional order placing over the telephone) is that one would be able to track the fluctuations in a particular stock and the market as a whole while deciding to execute the order and also while the order is being executed. And the confirmation of the executed order would also be available in real-time.

This is indeed a boon for those who don't have the time to visit the office of a broker or a sub-broker to peer at computer terminals that show the existing screen-based electronic trading quotes. In fact, the Sebi committee on Internet-based Securities Trading and Services has allowed the Net to be used as an Order Routing System (ORS) through registered stockbrokers on behalf of clients for execution of trades. This is compatible with the screen-based trading terminals of today.

Of the two software products launched by NSE, NeatXS is an order routing product for broker members with multiple locations, which enables computer-to-computer networking. It has an in-built risk management capability and has two variants - workgroup edition and enterprise edition - that are targeted at small and large brokers, respectively. NeatIXS, on the other hand, enables broker members of the NSE to offer Internet trading to their clients.

The other software - net.net - is a server-based product that provides brokers with complete software infrastructure to support Internet commerce, the ability to own html web transaction pages and the option to integrate existing websites. It also provides exchanges with the ability to send and receive data from its members over the Net on real-time or post-trade. It also allows brokers' clients to perform several functions over the Net including viewing market information, entering orders, creating one's own portfolio, viewing order/trade status, and providing on-line alerts on client activity.

How does the system work?
Under the ORS, a client can enter the name of the security, quantity to be bought or sold and price specifications in the electronic template/space provided by the broker on his site. Once the broker's system receives the information, the same is checked electronically against the client's account and routed to the appropriate exchange for execution by the broker. The client receives a confirmation on execution of the order. At the same time, the customer's portfolio and ledger account get updated to reflect the transaction.

This provides the client an opportunity to view the information and quotes on a real-time basis and act on it accordingly. This also eliminates the chance of your broker mucking up a purchase or sell the security you desire at the price that you wanted. The entire blame would now lie on you!

Brokers would not be allowed to directly match orders with other members of their fraternity; all orders would have to be necessarily routed through the exchange mechanism. This would ensure transparency and security. Once an order gets placed, it would be executed at the desired stock exchange according to your specifications. Trade confirmations would be sent across simultaneously via e-mail as well as the broker's website through which you place your order. The timeframe in which you would like to receive the confirmation over e-mail could be specified at the time of placing the order.

As mentioned above, the software developed for Internet trading can assess issues like client risk as soon as the order filters in, and information about acceptance/rejection of the order would be conveyed to the client immediately. The software would also ensure that other formalities like margin requirements, payments and deliveries etc would be conveyed to the client according to the requirements.

How does one get started?
Anyone wanting to start trading through an Internet-based system would have to get registered with the concerned broker. To enroll as a client, one would have to fill in the requisite forms and also deposit a specified amount of money with the broker. This amount would include the margin money requirements of the broker.

The trading account would get activated once the money is deposited. Initially your trading limit could be restricted to the amount deposited with the broker. Similarly, if you transfer shares to a depository account with the broker, those shares would be used for deliveries.

Most brokers would like to begin with investment activities, rather than resorting to speculation as it would enable them to gauge the response from clients and also sort out glitches within the system. Once an account gets activated, the client would be given a unique 'Client Account Number' that would have to be quoted while executing any order. Regular brokerage would be charged on each trade as would be the associated depository charges. A client would be logging on to the site using a password, which could be changed.

How safe is it?
Various issues are involved with this concept: Apart from the safety of the trading system itself, other issues could be of the financial integrity and strength of the concerned broker, customer safety, frauds, hacking of the trading system etc. Sebi is working overtime to ensure the security, reliability and confidentiality of data through the use of encryption technology prior to commencement of Net trading.

Sebi has also asked the concerned stock exchanges to ensure that records (maintained electronically by brokers) are not prone to manipulation. Adequate back-ups and storage facilities have also been made mandatory. Other anti-hacking methods like a unique 'User Identification Number', passwords that can be changed from time to time, etc have already been incorporated in various softwares.

Individual brokers wanting to provide Net broking services have been asked to maintain a minimum net worth of Rs 50 lakh. This should be ideal to support the initial stream of orders generated over the Net. Corporate members or a team of brokers would be asked to maintain net worth requirements and increase it if necessary later.

To prevent clients from cheating brokers, Sebi has asked stock exchanges to ensure that enough information about the client and adequate security are collected before starting his business. Further, the brokers have also been asked to set individual exposure and turnover limits for each client.

Safeguards like a model client-broker agreement (spelling out all obligations and rights of both parties), arbitration rules, investor protection rules, stock exchange rules etc should be made available on the website as well as in hard copies.

But from the open outcry system in the early nineties to the screen-based trading of the late nineties, the stock exchanges have witnessed a lot of changes. Now the investor has the option of directly controlling his trading future via Internet trading.

Stocks

Tell us what you think of this feature