A STUDY ON IMPACT OF INFORMATION TECHNOLOGY ON INDIAN STOCK MARKET: WITH SPECIAL REFERENCE TO NSE Paper III: Seminar Presentation(Pre PhD, Part I Examination - 2015)

Seminar paper presented in partial fulfillment of the Pre-PhD Examination in

Department of Commerce and Business Administration

Submitted by

Gangineni DhanaiahResearch Scholar

(Regd no Y14 COMR 021)

Research DirectorDr. R. Siva Ram Prasad

Co-ordinator,Department Of Commerce & Business Administration

Acharya Nagarjuna University

Department of Commerce & Business AdministrationAcharya Nagarjuna University

Nagarjuna Nagar 522 510, Andhra PradeshJanuary 20151. INTRODUCTION

In India, Capital markets are playing an increasingly important role, with the stock exchanges acting as their fulcrum. Stock Exchange as an institution has long history in India dating back 100 years ago. Over the years, price discovery has become more efficient, transactions have become faster, safer and cheaper, number of investors has risen and markets have become globalized. Indian markets have become larger, deeper, diversified and more modernized.

IT plays a dominant role in the management of Stock Exchange World over. IT has transformed the working of Stock Exchange in the global scenario. The rapid advances in information technology have determined important changes and innovation in the operation of Stock Exchange. Information Technology advances have produced, and continue to determine important changes also in the way trading activity is carried out, thereby affecting market dynamics, price formation mechanism and price volatility. IT has impact on management of Stock Exchange through reporting and surveillance activity, allows regulators to assess the adequacy of any regulatory measures in place.We present in the following tables statistics and data relating to a) Miles stones in the history of Indian stock market development

b) The chronological introduction of automation in stock exchanges around the world

c) A description of latest data relating to market participants in Indian securities market.

Table 1: Important mile stones of evolutionary development of Indian stock marketDateEvent

18751. Formation Native share and stock brokers association

19572. BSE Granted permanent recognition

19863. Sensex Lunched

19924. Empowerment of SEBI

19925. SEBI Formulated Insider trading regulations

19946. Establishment of NSE

Nov 19947. Trading in Equities at NSE

19958. BSE On-line trading system (BOLT) introduced

19969. Commencement of NSDL

Apr 199610. Launch of CNX NIFTY

Feb 200011. Commencement of Internet trading

Jun 200012. Commencement of Derivatives trading (Index Futures)

Dec 200013. Commencement of WAP trading

Apr 200214. Shift to T+3 settlement

Apr 200315. Shift to T+2 rolling settlement

Jun 200416. Launch of STP interoperability

200517. Incorporation of BSE limited

Nov 201018. Launch of mobile trading

Source : Various annual reports of SEBI and NSETable 2. Some automated stock exchanges around the world

CountryExchangeSystemYear of automation

AustraliaASXSEATS1987

CanadaTSETOREX2000

FranceParisCAC1986

GermanyFWBXETRA1997

Hong KongSEHKHKTS1993

ItalyMilanGTB1991

JapanTSECORES1982

MexicoBMVSENTRA1996

SingaporeSSECLOB1987

SwitzerlandSWXSWX1995

SpainSSESIB1991

USANYSEABS1991

USANASDSOES1985

Source : World federation of Exchanges (WFE)Table 3: Market Participants in Securities MarketMarket Participants

FY 2012

FY 2013

FY 2014

Depositories222Stock exchanges ( Nation wide)223Brokers ( Cash Segment)1026810128941Brokers ( Equity Derivatives)233729573051Sub-brokers ( Cash Segment)771417024251885Source : Indian Securities market review , 2014Table 4. No of Listed Companies in India

Year

NSE

BSE

2011-12

1646

5133

2012-13

1666

5211

2013-14

1688

5366

Source : ISMR 2014

2. LITERATURE REVIEW

There are extensive studies, reports and books available on Indian Stock market. We have reviewed some literature pertaining to the topic under study. The relevant literature is reviewed on basis of books, periodicals, newspapers and websites. The detailed review is given below.Cardella,et.al(2014) in their study entitled Computerization of the Equities, Foreign Exchange, Derivatives and Fixed Income Markets surveyed empirical studies on the development and effects of increased computerization across various financial markets. The researchers find that there have been dramatic changes in certain derivative markets, foreign exchange and in particular equity markets. The research has found positive effects of computerization on measures of market quality, but the survey highlights that human intermediation is still prominent and beneficial in certain areas.

In a report entitled The future of computer trading in financial markets published by Government office for Science reports that there is no direct evidence that high frequency computer based trading gas increased volatility.

Surti & Desai (2013) in their study measures the impact of increase in trading hour on Indian Stock Exchange. For this study primary data are collected through structured questionnaire from Bardoli region and for this purpose three different questionnaires were prepared that is for branch manager, relationship manager and customers. To measure the reliability of the survey reliability test is used. Bhunia & Ghosal ( 2011) in the paper titled An impact of ICT on the growth of capital market empirical evidence from Indian Stock Exchange investigate the impact of ICT on the growth of the Indian Stock Exchange using a modified version of the Gompertz technology diffusion model introduced by Chow (1983) and accordingly reshuffles the model with ICT development. The results of the study reveal that preferred variables are appreciably affected by information and communication technology more than ever in respect of amplifying the number of stock brokers, investors and admittance to ICT.

Ming-Chi Lee (2009) in a study entitled Predicting and explaining the adoption of online trading: An empirical study in Taiwan investigates how stock investors perceive and adopt online trading in Taiwan. We developed a research model which integrates perceived risk, perceived benefit and trust, together with technology acceptance model (TAM) and theory of planned behaviour (TPB) perspectives to predict and explain investors' intention to use online trading. The model is examined through an empirical study involving 338 subjects using structural equation modelling techniques. Report on Indian Exchanges (2009) by IDFC research describes that transparency, annuity revenues; high operating leverage and solid entry barriers make exchanges a near-perfect business. The report further argues that Indian Exchanges are almost on par with global peers in terms of corporate structure and sophistication of systems, Indian Exchanges are gathering scale. As elucidated in the report exchanges have been around for centuries, but the business model continues to strengthen with the industry increasingly gaining depth.

Shah, etal (2008) in the book titled Indias Financial Markets observes that the public equity market within India, both spot and derivatives, takes place almost entirely at the two exchanges NSE and BSE. There is an open electronic limit order book (ELOB) with order matching by the trading computer. The author reports that the processes of organized financial trading in India have focused on Exchanges.In a paper titled politics of market micro-structure, John (2007) describes the rapid technological change that characterized Indian financial markets in the last three decades of twentieth century by increasing the opportunity costs of maintaining Indias unreformed equity market microstructure. The author argues that India eventually adopted many latest innovations, leapfrogging from archaic market institutions and practices in the early 1990s to international best practices at the beginning of new millennium. The paper further elucidates that by 2001, reforms brought India up to par with the global standards for every aspect of its equity market microstructure.

Jain & Johnson (2006) in their article titled Trading Technology and Stock Market Liquidity: A Global Perspective expound on technological revolution that swept financial markets around the world. Computerization and satellite communication have transformed the organization of stock exchanges and improved secondary market liquidity.

Lee (2002) in the paper titled The future of securities exchanges presents a range of predictions about securities exchanges. The author analyzes that historically, exchanges have had seven main types of revenues: 1) Membership subscription, fees for 2) Listing, 3) Trading 4) Clearing and 5) Settlement and charges for the provision of 6) Company news and for 7) quote and trade data. In the paper four broad themes related to securities exchanges are discussed concerning information, industry, governance and politics. 3. RESEARCH GAPMaking observations from the review of literature, it can be concluded that there is no precise study which addresses the impact of Information technology on Stock market development either in the Indian context or in International background. Hence, this study may be treated as pioneer work on the impact of IT on stock exchanges in promotion of capital market. Although there is no dearth of work on stock exchanges and capital market but no one has addressed the key issues. By and large the works relate to price behaviour, market efficiency, market uncertainty, market crash & scams and market reactions to corporate events.

The capital markets are the back bone of the economy and have a crucial role in the consolidation and development of Industrial sector. These capital markets depend upon the effectiveness and organisational mechanism of stock exchanges that play a cardinal role in promoting the level of capital formation through effective utilization of domestic savings and by attracting foreign capital for long term purposes. Thus there is need to verify as to what extent stock exchanges are impacted by automation. Therefore, present study examines the impact of IT in Indian stock market.

Until now the majority research has focused on developed countries financial markets. Therefore this topic in the Indian Context needs lengthy analysis and more research attention.

The present study is an addition to the existing body of knowledge as very scanty work is available in this area of research in case of India. There are very few journal articles and publications related to the area under study.

4. NEED & SIGNIFICANCE OF THE STUDYInformation Technology has transformed the stock market from the periodical disruptions of a market functioning from a hall with gesticulating and open outcry to usage of VSATs, leased lines and uninterrupted uplinking on all trading hours.The study is significant as all over the world investments in securities are making an unprecedented growth. With the advent of computerization complimented by the advent of internet and online trading becoming a reality, it has become relevant to study the extent of impact created by the process of Information Technology in the Stock Exchanges.The study aims to highlight the impact of information technology in terms of reduction in transaction costs, ensuring market integrity, fair and transparent prices for participants, effective surveillance on fraudulent practices. the Indian Stock Market. The study will point to further research regarding the progressive growth of Indian Stock Market and role of IT.

5. STAMENT OF THE PROBLEM5.1 ) Floor-based Trading prior to 1994

Equity trading in India was dominated by FBT on BSE upto late 1994. This process had several problems of non-transparency and illiquidity. The non-transparency of the FBT led to market abuse such as investor being charged higher prices for purchases compared with actual prices traded on the floor. During this period it was not possible for the investors to cross check the prices.

The BSE was located in Bombay the primitive state of telecom in India coupled with the use of FBT, greatly limited market access to investors outside Bombay. It also generated low liquidity for the market as a whole, by being unable to access the order flow from outside Bombay5.2) Scenario Post-Screen Based TradingNSE built an electronic order matching system where computerization of trading took place it used satellite communications to make this highly accessible from locations all over the country. Electronic trading place role in reducing search costs for market participants.

5.3).Trading Mechanism, Settlement system, Trading efficiency & Dematerialization

The researcher wood like to study how electronic trading systems and automationa) Reduced manipulation of Prices and hiding of Audit trails of such manipulation.

b) Ensured that investors received time based priority and correct price for their tradesc) Fundamentally changed the BSE , NSE as they were allowed to extend electronically nation wide from 1996-97d) How the initiatives facilitated by implementation of IT reduced transaction costs in Indian stock market.

e) How the wide-spread usage of IT will safe guard market integrity and act as a effective check for instances of fraudulent trading

6. OBJECTIVES OF THE STUDY1) To study automation infrastructure scenario of Indian stock exchanges such as NSE

and BSE in comparison with the exchanges of developed countries such as NYSE, NASDAQ2) To compare the pre-technology era of Indian Stock Market to post-technology era

3) To identify the Information Technology Impact parameters in the stock market

4) To analyze the Impact parameters and interpret using various statistical methods.

.

5) To study the satisfaction of stake holders of Indian stock market regarding Information

Technology implementation. 7. HYPOTHESES1. Indian Stock Exchanges today are at par with developed international stock exchanges in terms of use of IT.2. There has been substantial increase of investor satisfaction by IT implementation

3. There has been substantial reduction in transaction costs due to IT implementation in Indian Stock Market

4. There has been substantial increase in efficiency of regulation & surveillance by stock exchanges using IT implementation.

8. RESEARCH DESIGNResearch design is the conceived plan and structure of investigation to obtain answers to research questions. SELECTION OF SAMPLE8.1) Exchanges:

NSE

BSE

Sample of around 100 professionals from various fields like Officials from exchanges,Academicians related to financial markets, Journalists and Analysts from financial media including press and electronic media will be contacted for the required information.8.2) Brokers Around 100 Members of Exchanges (Brokers) will be identified and will be contacted for data collection which is 10% of the total brokers in the Stock exchanges8.3) Investors

Investors in equity market were contacted and questionnaires were collected with information on impact parameters. Sample of 800 investors from various cities will be contacted.Data Collection & ResourcesSources of Data

Primary Data

Primary data is proposed to be collected through questionnaires and also personal interviews and schedules of officials of stock exchanges, brokers and investors will be used for data collection. Observations, Interaction and Interview methods will be used.

Secondary DataThe research is also based on desk research based on secondary data compromising of published reports of various institutions. The data also gets derived from RBI, SEBI publications, directives and circulars, committee reports,books,research publications both published and unpublished. Electronic media and websites of stock exchanges, business news papers like Economic Times, Business Standard, Business Line and magazines related to stock market were utilized for the study.The collected data would be subjected to proper recording,editing,classification,tabulations and interpretations as per the well established practice of social research methodology.

Secondary data is collected from the following sources Research Journals

PhD and M Phil dissertations Various central and state govt publications

Public records and statistics Books, Magazines, News papers and periodicals

Other relevant websitesSampling Procedure

The questionnaire approach will be used for the collection of primary data. In this study the primary data will be collected from 800 investors. Questionnaire will be distributed through on-line platform through websites and offline platform through various sections of people. Questionnaires will be hand delivered to many people while personal interviews will also be taken to ensure a degree of objectivity in the survey data, selected investors will be personally interviewed to verify the accuracy of the self reported data. The responses will be received from those investors who wish to contribute to research willingly.

Steps were taken as far as possible to ensure that the respondents were selected impartially and they would give a true representation of the sample.

The researcher proposes to use purposive sampling technique and snow ball sampling technique and wants to collect information from employees of members of exchanges, broking companies, Investors and market experts including academicians and experts from financial media.Statistical Tools & TechniquesSeveral methods will be adopted for analyzing the relevant data and drawing conclusions. For the purpose of analyzing the data appropriate statistical techniques are used.The analysis part of the present research will be made by using various statistical tools like ANOVA, Correlation analysis, Percentage analysis and Software packages like Excel & SPSS.9. LIMITATIONS OF THE STUDY1. The study considers only two exchanges. NSE and BSE as there is nil trading on other regional stock exchanges.

2. The study is limited to data available with Exchanges.

3. The study is limited to the sample size of 600 investors in Indian stock market10. Chapter SchemeChapter NoProposed Contents

Chapter IIntroduction

Chapter IIReview of Literature

Chapter III Role of IT Indian Stock Market

Chapter IVResearch Design

Chapter VAnalysis of Data

Chapter VIFindings, Suggestions and Conclusions

References

AppendicesREFERENCES:

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