Market Stakeholders

We now have a decent grip on what are markets in general and financial markets in particular. From here onwards we will be specifically focussing on stock markets and their related derivative markets unless and until we specify about any other markets.

Let’s zoom in on the stock market and understand how it functions and who all are involved in the smooth functioning of the market.

Regulator: Every market needs to be governed by a set of rules and a regulator to ensure that the rules are adhered to. In India, the Securities and Exchange Board of India (SEBI) plays the role of the market regulator.

SEBI regulates the operations of the stock exchanges, commodity and currency exchanges and their derivative markets. The regulator actively changes and tweaks rules to stay with the times.

Apart from having rules that govern the operations of the market, SEBI also governs the primary market. A primary market is one where a company approaches raising money from investors through a process called as Initial Public Offer (IPO).

The regulator has rules that control the functioning of exchanges, clearing agents, brokers, investors and traders. All grievances relating to the market are handled by SEBI.

Exchanges

Stock exchanges are the marketplace where the transactions take place. Buyers place their quotes on the exchanges which are completed when a seller agrees to match them.

Companies have a right to choose on which exchange they want their shares to be listed at the time of the initial public offering. Further, exchanges also have minimum criteria which have to be matched by the companies to get listed.

The two main stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Brokers

A trader or an investor interested in transacting in the market has to be registered with a stockbroker before initiating a trade in the market.

Stockbrokers are intermediaries who are registered with the stock exchanges and SEBI. The brokers have a choice of being a member of one or many exchanges. Similarly, they can choose to be members of either the cash segment, derivative, currency, or commodity segments or all of them.

A client has the choice of selecting the broker and the segments in which they want to participate.

There are various types of brokers in the market broadly they are classified as full-service brokers and discount brokers. Since the last decade discount brokers have grown faster than the traditional brokers, thanks to technological advancement and lost cost business model.

Depository and Depository Participants

When shares are bought they are stored in an electronic form in an account known as the DMAT (Dematerialised) account.

These DMAT accounts are opened through Depository Participants (DPs) who can be either brokers or banks. These Depository Participants have to be registered with the central depository.

There are two depositories in India. The National Securities Depository Limited (NSDL) and the Central Depository Service (India) Ltd (CDSL). These depositories are in turn registered with SEBI.

Apart from storing shares, these depositories facilitate in smooth functioning of the market through proper settlements by transferring deliveries of shares when they are sold.

The role of a DMAT account and all the way up to the Depository is restricted to the cash market.

Clearing Corporation

The back office work of the exchange is the responsibility of the Clearing Corporation, an organisation that is SEBI registered and associated with the stock exchanges. The Clearing Corporation of India (CCIL) was established in 2001.

A Clearing House has the responsibility of confirmation of trade to settlement and delivery of transactions. The Clearing House not only is responsible for the cash market but also the derivatives market, government securities, foreign exchange markets, and money markets.

Companies

On the stock exchanges, shares of listed companies are traded. The companies get listed on the exchanges when they approach the primary market to raise funds from investors.

After the initial public offer (IPO) the stocks get listed on the exchanges and trading starts. When a stock trades in the exchange it is said to do so in the secondary market.

The stocks can get listed at the price offered during the IPO, higher or lower, depending on the market condition. Investors who were allotted the shares can either sell these shares when they are listed, add more, or hold on to what they have.

Market Participants

Market participants are the actual players in the market who are involved in the process of buying and selling. There are various types of market participants. The broad head under which they can be classified are Investors, traders, market makers, and arbitrageurs.

Investors are those who buy and hold their shares after taking a long term investment view. Traders or speculators are they are sometimes called, are short term players who are in the market to take advantage of short term price movements.

Market makers are players, who are normally assigned by the exchange, to provide liquidity in the market. Arbitrageurs are players who capitalise on the price differential between two exchanges, like BSE and NSE, or between two asset classes like cash and futures.

SEBI also classifies players in the market as Proprietary, Institutional, and individual. A proprietary investor or trader is one who has their own broking card or is a member of the stock exchange. An institutional player is a mutual fund, pension fund, foreign institutional investor, corporate or banking treasury, or an insurance company. Everyone else is classified as an individual trader.

Frequently Asked Questions (FAQs)

Who are market stakeholders?

There are various entities involved in the smooth functioning of the capital markets. From the regulator, the Securities and Exchange Board of India (SEBI), which regulates the market and everything related to it, to the stock exchanges where shares of companies change hands. Brokers who facilitate the trades, companies that are listed on the exchanges, and the various participants in the market are all market stakeholders.

What is the role of the regulator?

In India, the market regulator Securities and Exchange Board of India (SEBI) plays the role of the market regulator and governs by a set of rules to ensure that the rules are adhered to.

SEBI regulates the operations of the stock exchanges, commodity and currency exchanges and their derivative markets. The regulator actively changes and tweaks rules to stay with the times.

The regulator has rules that control the functioning of exchanges, clearing agents, brokers, investors and traders. All grievances relating to the market are handled by SEBI.

Why are brokers important in the market?

Stockbrokers are intermediaries who are registered with the stock exchanges and SEBI. A client has the choice of selecting the broker and the segments in which they want to participate. Without registering with a broker a client cannot place their trades in the market.

What role does clearing corporation play in the market?

The back office work of the exchange is the responsibility of the Clearing Corporation.

The Clearing House has the responsibility of confirmation of trade to settlement and delivery of transactions. The Clearing House not only is responsible for the cash market but also the derivatives market, government securities, foreign exchange markets, and money markets.