Project Report On

ONLINE TRADING Submitted for Partial Fulfillment for the Award of the Degree of

MASTER OF BUSINESS ADMINISTRATION (MBA 2010-2012)

UNDER THE GUIDANCE OF Mr. ANURAG GUPTA

Submitted by RATIKA JAIN

ENROLMENT NO.: 14519103910

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CERTIFICATE
This is to certify that the Project Report titled ONLINE TRADING is an original work submitted by RATIKA JAIN. Enrollment No. 14519103910, MBA II semester student of Gitarattan International Business School (giBS) for the partial fulfillment of Master of Business Administration (MBA) program of Guru Gobind Singh Indraprasth University under the guidance of Mr. Anurag Gupta & the same has not been submitted to any other University or Institute for award of any Degree.

Mr. Anurag Gupta Professor Project guide

Dr. S.S. Narula Director Gitarattan International Business School

Gitarattan International Business School 2

DECLARATION
I, Ms. RATIKA JAIN, Enrollment no. 14519103910, MBA II Semester hereby declare that, the project report titled ONLINE TRADING is an original work done by me under the guidance of Mr. Anurag Gupta & has not been submitted to any other university or institute for the award of any degree or diploma or fellowship.

Dated: 1st May, 2011 Ms. Ratika Jain Enrollment No. 14519103910

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ACKNOWLEDGEMENT
Research is a venture that requires cooperation of many people. I feel pleasure in taking this opportunity to express my sincere regards to my supervisor Mr. Anurag Gupta, Profesor, Gitarattan International Business School, New Delhi. Without his guidance, valuable suggestions, constructive criticism & encouragement throughout the course of the project the present shape of work would not have been possible. I wish to place on record my gratitude to Dr. S.S. Narula, Director & Mr. Rajesh S. Pyngavil, Program Coordinator, Gitarattan International Business School, New Delhi for their continuous encouragement & advice which were of immense help to me. I am also thankful to all teachers, non teaching staff & all my friends of the institute for their kind help.

Ratika Jain Enrollment No. 14519103910

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INDEX

Topic
1. 6 2. 8 3. 10 4. 15 5. 17 6. 17 7. 18 8. 19 9. 20 BOLT-The BSE Architecture. Network Design.. Introduction Executive Summary

Page no.

Emergence of e-broking in India.

Online Trading Infrastructure......

Indian Exchanges.

Network Elements...

NEAT- The NSE Architecture

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10. Recommendations of SEBI. 21 11. Issues in Selection of e-broker 24 12. Advantages of Online trading. 25 13. Disadvantages of Online trading. 27 14. Growth 29 15. Bibliography.. 36 16. Glossary. 37

EXECUTIVE SUMMARY

As per the title suggest the project report has been prepared regarding the growth and development of online trading in India. Online trading was initiated by NSE in India and soon after the other exchanges also followed it. There was a major boom in yr. 2000 when lots of online trading companies came with a bang but only few were survived because of lack of computer knowledge and low internet penetration.

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There are two types of online trading companies one is the banking online trading companies and the other is non-banking trading. A few examples of banking online trading companies are HDFC securities, ICICI direct.com, UTI securities etc. On the other hand non banking trading companies are sharekhan.com, Angel Broking, Reliance Money etc. Today online trading contributes are about 8-10%. It is continuously growing and has a huge market potential. A study was undertaken to determine the growth of various online trading companies in India in terms of trade done by them through online and services provided by them. Major findings indicates that out of 100 investors it was seen that 77 investors prefer online trading because of few major factors such as time saving convenience, protection through Freudian brokers etc. although during my research project Ive seen that most of the people feel online trading, a secure way of investing into stock market still a few of them feel it unsafe and a bit complicated but they posses information about online trading. Today the online trading companies having cut-throat competition in our offering whose brokerage discounts lower margin money and zero balance accounts. Due to the rising education awareness and use of internet there is a huge potential for online trading in future and companies must come up with innovative offerings to capture the untapped market.

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INTRODUCTION
WHAT IS ONLINE TRADING Online trading involves investment activity which takes place over the Internet and it does not require physical inclusion of the broker. An investor has to register with an online trading portal like ICICIdirect.com, motilaloswal.com and sharekhan.com and many companies like that and investor gets into an agreement with the firm to trade in different securities according to the terms and conditions given on the agreement. As the servers of the online trading portal are Gitarattan International Business School 8

connected all the time to the stock exchanges and designated banks the order processing is done in real time and investors can also have updates on the trading. They can also check the status of their orders either through e-mail or through the interface that it cannot be accessed by a third party. Some options are usually given to users such as to link their bank account, Demat accounts and brokerage accounts into a single interface. A single window is also there for all exchanges and a single screen is there for the complete order routing mechanism. The hardware used comprises Web and application servers, switches, routers, firewalls and security devices, and specialized appliances. There are two broad models in play in the online brokerage space1. Bank-backed firms 2. Entrepreneur-floated firms. Bank-backed brokerages such as ICICIdirect and HDFC Securities have expanded on the basis of their brand name and the trust of investors in them. The integrated 3-in-1 accounts offered by these bank-backed brokerages help their parent bank by giving it accounts along with float income. In second case i.e Entrepreneur-backed companies like Sharekhan, Indiabulls, Religare and India info line have expanded by offering customers a mix of online and offline accounts, higher margin finance amounts and lower brokerage rates. Though the bank based has performed better but the latter have not lagged too far behind. The reason why online trading has developed over conventional offline brokerage firms is that this conventional method struggled with unfavorable economies. Staff cost is just one example of it. As the markets opens for 330 minutes a day one dealer can at best execute 500 trades in a day while online company like ICICI direct executes 150,000-200,000 trades a day on the National Stock Exchange alone accounting for 3-4% of NSE trades of 5 million a day. It would require a large amount of dealers to Gitarattan International Business School 9

service this demand. Besides the salary costs it would also demand huge expenses in real estate and support systems. The offline model has got a downfall in the form of lower bandwidth and IT costs and the cost of bandwidth has fallen to one-eighth of what it was in 2000 giving online broking an advantage especially in the case of lower-volume retail investors. Today 30% of volumes on the NSE comes from this and it may go up to 50% in three-four years providing explosive growth for online broking in India. To be a successful trading portal it will definitely depend on bouquet of services provided by it for an end-user. Most of the portals charge a small registration fee and brokerage based on various conditions but it's important for the organization to keep focussed on customer-centric services and delivery models to actually enjoy the most attention.

THE EMERGENCE OF E-BROKING IN INDIA The Indian trader is being fancied by the democratized world of online trading or also known as e-broking. The regular and attractive advertisements in the print media and electronic media have added to this fancy world. But as we compare to the Western countries, in India online trading has not still grasped the market, but has done a very important amount of progress in the past years and the future of online trading is bright. That is why many new companies are coming into this form of business structure and the existing companies are changing to this new format Gitarattan International Business School 10

besides offline and other traditional forms of business. With only a mere share of 10% online trading a combined gross turnover of around Rs.9000-10,000 crores handled by the BSE and NSE together there is a much greater scope for online trading. At present some of the dominant players in the online trading market of share market are 1. Sharekhan.com 2. Icicidirect.com 3. Unicon 4. 5paisa.com 5. Indiabulls 6. Kotak Securities 7. Motilal Oswal 8. Geojit Securities 9. Angel Trade 10. Reliance Money 11. Religare 12. Karvy 13. IL&FS Earlier the share market was not safe enough to invest but some of the changes in the past ten years in the Indian share market have created the interest of trading in the shares by the people. Broadly we can classify three important factors which have contributed to the development of online trading in IndiaFirstly the major step was taken by the National Stock Exchange (NSE) in the year 1994 which allowed the electronic trading and seeing to this various other stock exchanges in India followed soon. This helped in making the fast .accurate and transparent transactions saving a lot of time then the traditional method of trading. The investors were also saved by the clutches of the fraud brokers at the times when the clients were not aware of the true prices of the shares.

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Secondly, in the year 1996 the dematerialization of the shares came (also known as DEMAT) which avoided the online presence of shares in an electronic form avoiding them from theft, pilferage or from other losses like counterfeiting and frauds regarding share transfer. The third reason was the rapid growth of computer education and learning of internet by the people. With the evolving of internet the online trading became a hit and the investors became confident in investing just with a click of a mouse. With the happening of such events the ratio of trading has improved a lot. As it takes less time people praise this technology for trading purposes. Some people who traded rarely now even trades2-3 times every day as it provides edge of researching about companies on the internet. The number of small investors is increasing on the daily basis that trades on the internet. If a person invests or trades in equities, derivatives, commodities etc through the use Internet it is known as online trading enabling the investor to connect electronically to buy or sell stocks, derivatives etc with the other investors. This can be done with the help of online service providers like Sharekhan.com, ICICI Direct.com etc. A person can access a stockbroker's website through an PC connected to Internet and can place his orders. The benefits areA person can see the latest market movement through streaming quotes. Reduces time lag due to self-execution and instant confirmation. Empowers traders to have a complete control over their trading decisions. A person can access his accounts and related information on the Website. Provides greater convenience of trade as a person can trade from home or other convenient location. It is cheap in terms of cost associated and offers reduction in overheads A trader can view the historical charts on his computer. Gitarattan International Business School 12

The Internet revolution has changed the way to communicate and the way to do business in todays society bringing us closer and closer to vital sources of information. It provides us with means to directly interact with service-oriented computer systems tailored to our specific needs; therefore, we can serve ourselves better by making our own decisions. This new access by the online trading customers to low-cost transactions and cuttingedge, real-time market information that formerly belonged only to brokers has opened up extraordinary new investment opportunities as well as a crucial need for state-of-the-art information. Today the investors use the Internet Client-Server technology to buy and sell the securities at an instant at any point of time. People investing online have reached the proportions. Online trading allows an investor to buy and sell shares on the exchange through Internet and helps in the direct control of his investments.

The data of the startup dates by some of the brokers in India and charges charged by them are shown in the table as below: TABLE 1: LAUNCH DATE AND FEATURES OF ONLINE BROKERS LAU NCH DAT E MA N S (%) BROK BRO KER AG E (TRA ) % Gitarattan International Business School 13 MIN. BRO KER AG (RS) E(DE LIVE RY) * RE GD. CH AR GE S (RS) BANK DEP OSIT OR Y ENC RYPT IO N LEVE L (BIT)

RGI ERAG

DING E

SHAREK HAN

Febu ary2000

25

0.25 #

0.1

16

500 HDFC or GTB HDFC

own DP

128

INVEST MART GEOJITS ECURITI ES

Febu 00 Febu ary20 00

25-

0.75

0.25

25

910

own DP

128

ary20 30 30 0.5 0.07 NA NA HDFC n k 1 0.11 10 paisa/ 0.200.85 0.43 share 25 750 ICICI 750 HDFC

own

40

/CitiBa DP

FGLOBA L ICICIDIR ECT

NYS* 2530 April -2000 100

own DP own DP

128

128

EQUITY TRADE KOTAK SECURIT IES ANANDR ATHIDIR EC T MONEYP ORE

July2000 Augu st2000 Septe mber 2 000 Septe mber

25

0.5

0.1

NA

200 0

HDFC/ HDF Citiba C nk HDFC/ Own Citiba nk DP

40

33

0.25

0.1

NA

500

40

25

0.25

0.05

NA

NA

HDFC/ Own Citiba nk DP

128

40

0.5

0.050.1+

NA

100 0

HDFC

any

40

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2 000 MOTILA LOSWAL NYS* 30 0.3-0.4 0.1 50 NA HDFC/ Own Citiba nk DP 40

# or Rs1000 per month l * Operations not yet seamless l+ statutory charges (Source: Capital Market)

ONLINE TRADING INFRASTRUCTURE The emergence of online exchanges has facilitated faster transactions by providing online trading portals and brokerage houses ease and flexibility. The Internet has indeed opened up new opportunities for conducting the business. The worldwide stock exchanges has made a major shift from the traditional method of trading and now conduct a bulk of its business online through its brokers and partners. In the developed countries majorly all the exchange transactions are conducted online. The trend took off slowly in India and the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) two of the largest exchanges in India have been conducting online trade successfully for some time. WHY ONLINE TRADING ENTERED LATE IN INDIA? The Indian exchanges and brokering houses have been very slow in moving their transactions online and the major reason has been the lot government regulations. The initial delay was due to laying down the specifications for creating Closed User Groups Gitarattan International Business School 15

(CUGs). This issue was resolved between the Department of Telecommunications (DoT) and the Finance Ministry around 1998 and after that soon came the online trading portals like ICICIDirect.com, motilaloswal.com,sharekhan.com and smartjones.com. Connectivity related issue was perhaps the most important technological factor. Traditionally the cost of leased lines and VSAT links has been very high and the reliability of the links was very low. To commission the links it took a long time as one had to make an application and wait for a few weeks for the link to be up and running. Many other issues like security, backup and recovery procedural costs also acted as deterrents in the process. Now with the resolution of regulatory issues India no longer have any pressing connectivity and bandwidth issues. The entry of private players into the broadband scenario and the government opening up the telecom sector these issues have become almost non-existent. Security solutions and services available in the market have matured and it doesn't cost a pretty packet anymore to put a simple backup solution in place. Through online trading everyday large volumes of data is being transacted. At BSE the average daily turnover in 2001-2002 (April-March) was Rs 1244.10 crore and the number of average daily trades was Rs 5.17 lakh. To control Online Trading RBI made regulations making it mandatory for companies to store atleast 7 years of transactional and financial data. 1. Design needs to be always-on, secure, redundant, and have adequate backup and recovery processes. 2. For such high amounts of critical data it's natural to deploy network-based storage like NAS or SAN. 3. Security is a vital and integral part of the design architecture. The hardware and software elements should be built around layered security architecture and should be held in place with a well-documented security policy. 4. Ideally online exchanges should have 'five-nines' availability. 5. It's difficult to deploy out-of-the-box applications at exchanges as each has a unique architecture based on factors like operations flow, trading volumes, number of members, number of users, and number of locations.

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6.NSE has deployed NIBIS (NSE's Internet Based Information System) for real-time dissemination of trading information over the Internet and NEAT a client-server-based application to help its operations. 7.BSE has deployed an OnLine Trading system (BOLT) on a Tandem platform which has a two-tier architecture. It claims to be able to support up to 2 million trades a day

INDIAN EXCHANGES: NSE and BSE The NSE and BSE are among the largest exchanges in the country handling very large daily trading volumes, support large amounts of data traffic, and have a very large nationwide network. The trading volume in year 2000 was huge with the average daily turnover in the capital markets segment at NSE is around Rs 2300 crore and in the derivatives segment, around Rs 1300 crore. The average daily traffic volume was around one million trades per day in the capital markets segment and around 50,000 trades per day in the derivatives segment and there were around 13,000registered users in both segments and an average of around 9500 users is logged in at a time. At BSE the average daily turnover in 2001-2002 (April-March) was Rs 1244.10 crore and the number of average daily trades was Rs 5.17 lakh. THE NETWORK DESIGN Any online exchange should always be-on, safe, secure, redundant and should have adequate backup & recovery processes. The Vice President of NSE-IT G.M Shenoy tells that the basic design objective of NSE was to provide fair, equal and transparent access Gitarattan International Business School 17

across all NSE nation wide locations and to provide connectivity to the trading members as soon as possible. The telecom sector is fairly liberal nowadays but way back in 1993 the technology was maturing and was very costly. The cost of lease lines was almost ten times as much as it is today. Satellite technology was a boon since it allowed quicker deployment than leased lines. Today NSE has the country's largest VSAT network with over 3000 VSATs and expects to grow to more than 4000VSATs very soon. NETWORK ELEMENTS When there are massive trading volumes and traffic bulk it makes one tensed even to think of the expected losses in case of a ten minute downtime when daily trade crosses Rs 3000 crore. Network elements like security, storage, backup and recovery processes, availability and other different applications are to be planned carefully and commissioned. Also the RBI regulations to store atleast 7 years of transactional and financial data has to be followed and to store such high amounts of critical data it's natural to deploy network-based storage like NAS or SAN. NSE is implementing a SAN as it feels that its data volumes have grown widely. Security is a vital and integral part of the design architecture and the hardware and software elements should be built with layered security architecture around and it should also be held in place with a welldocumented security policy. According to Shenoy the security is the most crucial element in the network and at NSE all applications have been built with a conscious approach towards security. All the security policies are tightly integrated and regularly scrutinized thus not providing any room to compromise with. Also all the applications and OSs are hardened time to time for safety. The Backup and recovery has emerged as one of the most important and vital aspects of business continuity. When online exchanges were designed earlier a lot of emphasis was perhaps not placed on this aspect as it is done nowadays. However it's not difficult to add continuity processes to a programme which is existing. Shenoy said that a terrestrialbased trading network was deployed as a backup to NSE VSAT network in the middle of 2000 and it have more than 850 leased lines connecting to different locations in India. Gitarattan International Business School 18

NSE is the only stock exchange in the country which has a fully-redundant business continuity site in Chennai. Availability: Ideally online exchanges should have 'five-nines' availability. Exchanges usually likes to host its infrastructure in-house and not use the services of an external or other data center. NSE claims to achieve uptime greater than 99.9% which is mostly due to internally formulated procedures and continuous review of SLAs with hardware vendors. Applications: It is tough to deploy out-of-the-box applications at exchanges as each has a unique architecture based on factors like operations flow, number of members, trading volumes, number of users and number of locations. The applications like trading, surveillance, index computation, listing, membership, clearing, risk-management and accounts may be developed in-house or by external software developers. There are two popular types of architectures1. NSE architecture 2. BSE architecture These both exchanges keep on updating and upgrading their technology systems to keep delivering according to commitments and promises made to its members, partners and customers. NEAT-THE NSE ARCHITECTURE NSE has deployed NIBIS (NSE's Internet Based Information System) for real-time dissemination it of trading information over the Internet and NEAT a client-server-based application to help its operations. All the trading information is stored in NEAT an inmemory database at the server end for achieving minimum response time and maximum system availability for users. The trading server software runs on a fault-tolerant STRATUS mainframe and the client software runs on Windows PCs. The telecommunications network uses the X.25 protocol and is the backbone of the automated trading system. Each trading member trades on the NSE with other members through a Gitarattan International Business School 19

PC located in the trading member's office. The trading members on the Wholesale Debt Market segment are linked to the central computer at the NSE through dedicated 64 Kbps leased lines and VSAT terminals. These leased lines are multiplexed using dedicated 2 MB optical-fiber links. The WDM participants connect to the trading system through dial-up links. The exchange uses RISC-based Unix servers from Digital and HP for back office processing. Applications like Oracle 7 and SQL/Oracle Forms 4.5 front ends are used for the exchange functions. BOLT-THE BSE ARCHITECTURE BSE has deployed an OnLine Trading system (BOLT) on March 14, 1995. It works on a TandemS74016 platform running on 16 CPUs. The Tandem Himalaya S74016 machines act as the backend to more than 8000 Trader Workstations networked on Ethernet, VSAT and Managed Leased Data Network (MLDN). The systems claim to handle up to two million trades a day. BOLT has a two-tier architecture. The trader workstations are connected directly to the backend server which acts as a communication server and a Central Trading Engine (CTE). Other services like information dissemination, index computation, and position monitoring are also provided by the system. A transaction monitoring facility in the Tandem architecture helps keep data integrity through non-stop SQL. With the help of MTNL, BSE has setup a MLDN Network comprising 300 2 Mbps lines and 1500 64 Kbps lines which connect all regional stock exchanges and offices in Mumbai. Access to market related information through the trader workstations is essential for the market participants to act on real-time basis and take instantaneous decisions. BOLT has been interfaced with various information vendors like Bloomberg, Bridge, and Reuters. Market information is fed to news agencies in real time. The exchange plans to enhance the capabilities further to have an integrated two-way information flow. RECOMMENDATIONS OF SEBI The SEBI has also played an important role in the issue of the guidelines regarding online trading so that the chances of fraud and misrepresentation are minimized. The some of recommendations are as follows: Gitarattan International Business School 20

The stock brokers which are being registered with Securities Exchange Board of India (SEBI) will have to apply to stock exchanges for a formal permission. The following conditions must be fulfilled1. The online trading company must have a minimum net worth of Rs 50 lakh 2. The encryption technology should be there in the system used by the brokers to ensure the provision for confidentiality ,security ,justifiability and reliability of data .The user id, first level and second level password, automatic expiry of passwords at the end of a reasonable period, secured socket level security for server access through Internet, suitable firewalls between the trading set-up directly connected to an exchange trading system and the Internet trading set-up, microprocessor-based Smart cards, dynamic password, 64 bit/128- bit encryption are the basic minimum security standards. 3. The brokers must maintain adequate back-up systems and data storage capacity which must be checked by the stock exchanges. 4. The minimum qualification must be laid down by the stock exchange to ensure that the persons hired by the brokers must have the proper qualification regarding trading so as to guide the clients and he can communicate regarding trading instructions. 5. To handle contingency situations and for review of incoming and outgoing electronic correspondence the respective stock exchange must develop uniform written rules, regulations and procedures. 6. To ensure the authenticity and accuracy of data a certification agency must be appointed using the certification technologies when notified by the government or the SEBI. 7. The better client and the broker relationship to be maintained.

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8. To determine the risk associated with the clients the brokers must have the have sufficient verifiable information about clients and the stock exchange must ensure it. 9. The clients must be taken into an agreement stating about all the obligations and rights including the minimum service standards to be maintained by the service provider broker for services specified by SEBI/exchanges for Internet-based trading from time to time. 10. The web site of the broker providing the online trading facility should contain information rules and regulations affecting client broker relationship, arbitration rules, investor protection rules, etc meant for investor protection. It should also provide and display prominently hyper link to the website/page on the web site of the relevant stock exchange(s) displaying rules/ regulations/circulars. Ticker/quote/order book displayed on the web site of the broker should display the time stamp as well as the source of such information. 11. An e-mail should be sent to he investor for the confirmation of his Order or trade. 12. The limits of trading and exposure provided to the client must be set on system-based control and brokers and exchanges must ensure it. The limits must be predefined by the broker on the exposure and turnover of each client. The system of broker should be such that it is capable of assessing the risk of the client as soon as the order comes in. The system should inform the clients client the reports on margin requirements, payment and delivery obligations etc. 13. As per the regulations the Contract Notes must be issued to clients within 24 hours of the trade execution. 14. Cross trades of the clients will not be allowed with each other to the brokers using Internet-based systems for routing client order and all orders must be offered to the market for matching. Gitarattan International Business School 22

15. A separate working group has been set up to look into the surveillance and enforcement-related issues arising due to Internet-based securities trading. However, general anti-fraud provisions (SEBI Fraudulent and Unfair Trade Practices Regulations, 1995) will apply to all transactions involving securities or financial services, regardless of the medium. ISSUES IN SELECTION OF AN E-BROKER Individual investors compare the brokerage provided by various online traders. Brokerage can be a key differentiator among different schemes offered by e-brokers in the present competitive market place. For example icicidirect.com was the first to enter into e-broking and charges the highest brokerage (for delivery transactions) at 0.85 per cent per trade as compared to Invest Smart which charges 0.75 per cent. Other competitors like 5Paisa.com, Sharekhan and Kotakstreet.com charges 0.25 per cent of the transaction value for delivery-based trades. The pattern of entry into e-broking shows that ``brokerage and associated costs'' can be the differentiators only for a time while. ICICIdirect.com as the first entrant, has touted itself as the first integrated e-broking service provider in the market. Although it charges high brokerage charges than its competitors it has positioned itself as the only player to have online broking, banking and depository interface in one module to offer a fully integrated online trading experience. Sharekhan, tried to overcome icicidirect.com by introducing a flat fee product of Rs. 1,000 per month. This innovation helped Sharekhan to get the investors who traded heavily and had not to worry about paying heavy brokerage .But the next launch in etrading halved the flat fee to Rs 500 and got an edge over Sharekhan. It also allowed short sales and offered clients the option of trading against securities up to three times sales marked for delivery providing for exposure. Thus innovation provides limited scope for it is a matter of time before almost all the schemes offer more or less identical features. All it depends is on the client's risk profile, preferences and requirements and each client may have to choose the different schemes.

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Online trading is still at infant stage and all the major players which have set up ebroking outfits aim to achieve two objectives1.To broad base the overall trading of investors, while holding their existing clientele intact. 2.Most settled e-broking players like ICICIdirect.com, Invest Smart and Kotakstreet.com are using their brick-and-mortar presence to encourage investors to go online. The investors are being assured if due to any reasons like poor connectivity or Internet infrastructure and that even if the Internet order-routing system breaks down or investor access is broken for any reason, online registered investors can have the option of putting through their orders offline. As this combination is still a new concept, most investors will be better off clarifying how the offline environment will operate, if the online environment fails for any reason. For the investor, the important thing is to ensure that this switch from online to offline is seamless and that there are no associated hidden costs. From the opinion of an investor viewpoint the click-and-mortar approach to investing may be the best bet till the online trading market matures in terms of technology, infrastructure and service to become a self-sustaining business proposition. The brickand-mortar brokerage outfit is likely to subsidise the investment in online trading technologies and further in the ongoing/recurring costs. Unless the share of online trading volumes increase dramatically to 10-15 per cent of the total trading volumes the traditional brick-and-mortar outfits will continue to dominate the market. The investor checklist is mainly a trends potter's guide to the selection of an e-broker. With most online trading outfits still forging agreements with payment gateways for online banking and with depository participants for online demat, it may be too early to differentiate the grain from the chaff among e-brokers. But the investors' checklist still looks at aspects that are expected to acquire prominence as online trading catches on.

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The pedigree of the e-broker plays a great role as to decide the serious players. Going forward, consolidation is inevitable even in this industry and when that happens, online trading sites such as icicidirect.com, Sharekhan, Geogit securities, Invest Smart and Kotakstreet.com with a good reputation have a much better chance of survival and growth than the stand-alone sites such as5paisa.com and Indiabulls. Technology and back office infrastructure used by these online companies may prove to a burden in the long run. It is good for medium to term investors looking at online trading from a perspective, sites with deep pockets and a pedigree will be a good choice. With the consolidation in the industry and standardization of technology the quality of service becomes the key differentiator. In the initial stage from investors viewpoint holding at least two online trading accounts with two different outfits will be good in the long run which helps in the evaluation of the quality of service and security-related issues of the two companies. So investor can switch to the better player according to his comfort level. The integrated package provided initially by ICICIdirect.com offered a seamless 3-in-1 package of broking, banking and demat accounts. This helped in reduction of the paperwork and time involved in settlements and transfer of shares or money. Although other players also started it but it gave a headstart to ICICIDirect. CurrentlyICICIDirect offers online trading services only to investors who have a bank or a demat account with ICICI bank and same is the case with Kotakstreet having a dmat a/c with Kotak securities and should have a bank account either with Citibank, HDFC Bank or Global Trust Bank ADVANTAGES OF ONLINE TRADING 1. Provides with the Freedom of Information

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The Internet provides a new sense of controlling our financial future as the amount of investment information available online is truly outstanding. An investor canKnow the price of any stock he desires at any point time on the internet. An investor can review the price history of any stock in chart format online An investor can follow in-depth the events happening in the market Helps an investor in receiving a wealth of free commentary and analysis about stock markets in the global economy Helps an investor to conduct an extensive financial research of any company he desires He may also consult with other investors online present around the world Some online stock broking companies provide real-time stock quotes, daily roundups of the stockmarket, expert commentary, and a deep community of fellow investors. 2. Provides Control to Investors Money When an investor wants to buy or sell stock he no longer need to call his broker on the phone thus helping in the execution of the order instantly on the internet.

3. Provides access to the market Through the sophisticated information streams, dedicated trading platforms and sophisticated tools the investor can access the markets which provides more agility in buying and selling stocks . 4. Ensures the best price for investors Some companies like Investsmart (IL&FS)specialize in the techniques which offers the best price deals for the buy and sell orders of the investors and traders providing the high level of transparency by displaying of information relating to the specific stocks and company profiles which helps in getting the best quote for the orders. 5. Online trading offers greater transparency Gitarattan International Business School 26

Online trading offers the investors with greater transparency by providing with an audit trail. The process involves a complete integrated electronic chain starting from order placement, to clearing and settlement and finally ending with a credit into the depository account of the investor. All these stages are inspected which brings the transparency into the system. 6. Provides hassle free trading Online trading provides an integration of the bank account, trading account and demat accounts, which leads to easy and paperless trading for the client. 7. Online trading allows instant trade execution Online transactions helps in the quick execution of the entire trading transaction right from logging to the traders site and to the settlement of the bank account in a very short period of time. 8. It provides a level playing field Trading online gives even the smallest retail investor access to information which was earlier available only to the big traders. It has provided with a level playing field for all investors in the securities market. 9. Online trading reduces the settlement risk This method of trading reduces the settlement risk for the investor as when a short sell order is played the orders are squared off at the specified cut-off time and are not allowed to be carried forward. 10. Provides live financial news & analysis The online sites also provide live terminals which provide streaming news to give investor the latest financial information as it occurs. 11. Online help desk

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Some companies provide online help desk an investor cancan contact the Tele Trading Executives from the Tele Trading team during and after market hours and can clarify questions. 12. Instant order trade confirmations Through online trading every trade is confirmed immediately and investor receives an onscreen confirmation following every trade with full details for the investors records which avoids costly errors that would have been discovered when it is too late. 13. Keeps Information Secure As per the guideline provided by SEBI every effort has to be made to keep the investors account and personal information secure by use of encryption technology and updated security technology to advanced fraud prevention measures. DISADVANTAGES OF ONLINE TRADING 1. In online terminal, investor cant get customized expert advice, whereas in offline the broker gives suggestions according to investors strategy (i.e. short term or long-term) 2. Brokerage is high compared to offline. 3. Privacy is less due to hacking scandals 4 .Transactional errors due to technical problems

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GROWTH According to an article by Krishnamoorthy B in 2005 after inception of online trading in India in the year 2000 online trading is gained momentum with trading volumes growing by 150 per cent per annum in theyears 2003-2005.The volume of all trades executed through the Internet on the National Stock Exchange had grown from less than Rs 100 crore (Rs 1 billion) in June 2003 to over Rs 700 crore (Rs 7 billion) in July 2005 which was a handsome growth. This also provided a massive rise in the number of Internet traders. At the end of July 2005, there were 108 registered brokers on the NSE and the number of Internet trading subscribers to about 1.054 million. And the top three players ICICIdirect.com, Indiabulls Gitarattan International Business School 29

and Kotak Securities had nearly 85 per cent of the total customer base. Today the ICICIDirect has nearly 36% market share. In March 2003 ICICIDirect had about 234,000 customers trading through its portal which rose to over 675,000 customers in the year 2005.According to Anup Bagchi the MD and CEO of ICICIdirect.com as their company was the first player to enter the online trading segment, ICICIdirect has made broking more structured and transparent which further reduced the operational hassles. At the same time the number of subscribers trading through the portal of Kotak Securities had gone up significantly by 150 per cent and the number of online trading customers had grown from 30,000 to 75,000. And the company expected to have at least 130,000 customers by the end of that fiscal. Indiabulls which was a late entrant in the game had its online customers growing from 35,000 in June 2003 to over 140,000 in the mid 2005. Out of total customer base of 180,000 majority wereonline customers. Indiabulls appointed 2,000 relationship managers to handle online clients. In the recent past years of 2005 ICICIDirect and Indiabulls recorded an annual volume growth of 100 per cent and IndiaBulls had about 30 per cent of India's online trading volumes. In the year 2005 the online revenues grew faster for Indiabulls than offline revenues (online revenues increased from 40 per cent to 60 per cent of the total year 2004 andclients wanted abackup while trading online. ICICI Direct had 7.5 lakh registered users online in the tear 2005 more than five times what Indiabulls had. In 2005 number of demat accounts doubled to 7.1 million with the facility of online trade since 2002. From the years 2000-2005 the online broking grew to account for a tenth of the total trading volumes. If the numbers are considered for only the retail segments, the growth is starker. Almost half of the Rs 5,000 crore-6,000 crore daily market volume on the NSE accounted for by non-retail

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Online trading represented 30 per cent of Sharekhan's broking business in the year 2005. The number of customers registered with Sharekhan was 130,000 at that point of time of which 60,000used Internet trading. At that point of time despite the rapid growth of online trading in India it constituted a puny 8-10per cent share of the total turnover on the NSE although this rose from 2-3 per cent about two years ago. The big players expected a 100 per cent growth in their subscriber base every year for the next few years. According to a recent article in livemint.com while the Indian markets lag those in many emerging and developed countries in online trade volume, some of the share brokers expect that in the coming years the buying and selling of shares through the Internet would account for up to half of the total equity trade volumes. Today the total volume of online trade in India is about 20% of total trades. According to brokers the better broadband connectivity across the country and wider awareness of equity as an asset class will rise the online trade volumes to over 50% of total trade. In India the demography is such that two-thirds of the population is under the age of 36 and more than 50% is under age of 25 and this is another supporting factor for this view. According to Mr R. Kalyanaramanthe senior vice-president of Sharekhan Ltd the total number of traders opting for online trading is on a rising considerabily,though people are making more cautious investments. Sharekhan is the Indias largest online brokerage firm and the majority owned by Citigroup Venture Capital International and Infrastructure Development Finance Co. Ltd. Also according to him the online volume has suffered a dent because of recent market volatility and negative market sentiment. Sharekhan gets 60% of its brokerage revenue from the online trading. In 2003when there were only 10-15 brokers empanelled for Internet trading with theexchange and accounted just about 10% of total volume in Indian stockmarkets the number has increased to around 300 brokers wooing Internet-savvy investors. According to a recent study Ernst Gitarattan International Business School 31

and Young only 4% of Indias domestic household savings or just about 13% of its gross domestic product is being channel led to shares and debentures issued by companies which is very less or in an initial stage. Sudip Bandyopadhyay chief executive of RelianceMoney Ltd says that online investing is still at a nascent stage in India and expects that Internet-based trading will eventually take about half of the total stock market trading as like with developed markets such as the US. Philippines has the highest online trade with about 55-60% execution of trade is online. The reason is because they had wider Internet connectivity years before India. The biggest challenge in India remains better Internet connectivity. The earlier Web-based technology used for Internet trading has been replaced by specialized software which gives real-time global data streaming rates to trader helping investors to analyse the market trends and helps in faster execution of trades. Earlier the investors made trade calls over the phone which sometimes led to the delays. Online share trading in India was at a boom in the end of 2006 with daily-traded volumes more than tripling from Rs 1,500 crore to Rs 5,000 crore in the last one year and terminals was set up in small towns such as Rajkot, Hubli andVijayawada .In that year the share of online trading rose dramatically from 7%last year to 20% as a percentage of overall traded volumes. Due to this factor the top five US brokerage firms decided to make a foray into India in the next year driven by strategic interest. Also at that time nonmetros accounted for half of the daily turnover of online trading. In a crash of the market in the early Febuary 2008 the investors remained away from online trading and the turnover of the NSE from internet-based trading dipped to a daily average of Rs 1,648 crore between February 1 and February 8 as compared with Rs 3,450 crore in January 2008 Rs 3,587 crore in December 2007 and Rs 4,417 crore in November 2007 in the exchanges cash market segment. In the mid Febuary 2008 it accounted for just 12% of NSEs total cash turnover as compared with a high of 24% in November last year..

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The most online stock broking companies started from 2000 onwards because of development of global Internet economy and for years 2000 to 2003 the stock market was under a bear hug. The intense competition among a new wave of online brokerage companies hammered down brokerage rates from 1% (in 2000) to 0.25 %, or even lower to 5 paisa. According to Aseem Dhru, MD and CEO, HDFC Securities in todays scenario an online business can break even in as short a period as about 18-24 months. Earlier there were other problems like the Internet connectivity was unreliable, and investors resisted the strict margins and compliance online stock broking demanded. Initially it seemed that online stock trading would flop. In the year2003 online trades were a merely 2% of trades on the National Stock Exchange. Even the strong players like Kotak Securities could only get online transaction volumes of a mere Rs 25-30 crore in a day. A few companies like Hometrade and LTtrade went off after the dotcom implosion. But some determined companies like Sharekhan Ltd, Indiabulls and IndiaInfoline, remained despite the burden of huge cash-burn. Sharekhan, for example, is estimated to have lost Rs 20 crore on its launch campaign. According to R Kalyanaraman, Senior VP, Sharekhan at that time there was room to service the mass market through a trusted name and those who bore the pain are still around in the market to reap the gains. If seen today Kotak Securities deals online transactions worth Rs 1,000 crore a day. This may mean annual revenues of Rs 120 crore, assuming a 0.05% brokerage. But Kotak Securities total revenues including offline transactions are higher at Rs 834 crore. HDFC Securities have 500,000 online customers deals in daily online trades worth Rs 250-300crore is also in the black. The revenues it had in 2007-08 is Rs 100 crore. HDFC Securities hadrevenues of Rs 67 crore and a net profit of Rs 7.21 crore in 2006-07. ICICIdirect has 1.5 million online broking accounts and parent ICICI Securities reported revenues of Rs 750 crore for March2008. Sharekhan at present has 650,000 customers

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with daily Internet trading volumes of Rs 400-500 crore. The new player Reliance Money has 2 million online accounts trades worth Rs 2,000 toRs 3,000 crore per day. Today online trading accounts for 25-30% of retail market turnover that can make online stock trading a Rs 400 crore industry, measured by the brokerage earned by them. The online model has helped the companies to expand rapidly without big investments indistribution. Prasanth Prabhakaran, Senior VP and Head of Broking, Kotak Securities says that even though the company has no branches in Rourkela and Sambalpur it gives volumes and Tier-IIand tier-III cities bring in 40-45% of total trading volumes. Apart from cutting margins and making trades cheaper for investors, online trading has shaved off a lot of costs for brokerage firms resulting in business making more money. On the retail side of the business the companies having a stronger online presence are enjoying better profitability. But the offline business still rules institutional business. HDFC Securities earns 75% of its revenues from online trades. The key to success is quick ramp-up because the initial system set-up cost is based on assumptions on the number of accounts and trades that the firm will carry out and once the point is reached, the break-even can come faster. If today a new entrant comes he will have to start off with the capacity to handle at least 100,000 trades a day which could entail an investment of Rs 25 crore on the initial technology and hardware set-up. The annual expanses of around Rs 4-5 crore will also be needed to scale up. Industry size: Rs 5,000 cr Online share: Rs 400 cr Key players: HDFCsec, ICICIdirect, Indiabulls, Indiainfoline,

Kotaksecurities,Sharekhan Current growth rate: 40-50%

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The stock markets which saw a dip in online trading due to investor apathy because of prolonged bearishness in recent years is now witnessing a revival of interest and is expected to have a record growth in the coming years. Mr Tarun Shah, CEO of Sharekhan, Mumbai says that the retail investors in the capital market are the most neglected ones have no access to research and Sharekhan, seeks to fill this vacuum felt byre tail investor. Sharekhan has invested about Rs 13 crore in the last two years in creating the requisite infrastructure by way of branches and for Internet trading. Sharekhan has presence in about 80 cities across the country now and it is seeking to consolidate its presence in the current year 2008 and has focus on expanding its membership. Sharekhan enjoyed about 20 per cent market share in Web business (Internet trading) in stock markets and in past 3years Web trading showed lot of promise but as the market witnessed a downturn retail customers had no much interest in it. By then the company has been adding around 1, 000 customers a month and felt that for retai lcustomer web trading was a very good medium as it provides live information.Web trading constituted about 1 per cent to 2 per cent of the revenue Sharekhan in the year 2001-02. But in the year 2002-03 overall revenue of Sharekhan trebled and the share of Web trading constituted 22 per cent of the revenue. At that time the Sharekhan's daily trading volume was overRs 200 crore the Web trading constituted at about Rs 40 crore a day major part of the volume camefrom the intraday transactions. According to Tarun Shah the growth of Internet trading in the stock markets would come with arapid pace and web trading in the total turnover of the capital markets would go up to 10 to 15 percent in the next 2-3 years which is now just about 1 to 2 per cent.

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BIBLIOGRAPHY

1. www.sharekhan.com 2. www.icicidirect.com 3. www.kotakstreet.com

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4. www.bseindia.com 5. www.nseindia.com 6. www.bseindia.com 7. www.sebi.co.in 8. www.livemint.com

GLOSSARY 1.Intra Day Transactions-The deals which are done in the stock market on day to day basis and not carried forward for the next day. 2. Delivery-When the transactions are not done Intra Day and are carried forward for more than one day it is known as Delivery.
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3. Brokerage-It is the fees charged by the stock broking companies for facilitating the buying and selling of share market instruments. 4. DMAT-DMAT refers to dematerialization of shares in which the shares are kept in the electronic form instead of being it in physical form. For dealing in shares SEBI has made it compulsory to have a DMAT A/C.

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