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Non Banking Financial Company (NBFC)IKM Investors Services Limited

Management of Information Systems : Project report

by

Ajay Kumar Dhamija (N-1)

Mandeep Singh Rekhi (N-27)

Raghav Raj Budhiraja (N-39)

Ravinder Singh (N-41)

Tripat Preet Singh (N-43)

Snehal Soni (N-47)

Kunal Kapur (N-69)

under the guidance of

Prof. M.L. Singla

Faculty of Management StudiesUniversity of Delhi, Delhi

October 2007

Abstract

Financial System of any country consists of financial markets, financial intermediation andfinancial instruments or financial products.NBFC (Non Banking Financial Company) isfinancial Institution that has a principle business of receiving deposits under any schemeor an arrangement or investing/lending in any manner.There has been an exponentialgrowth in India in this sector ie NBFC.This report specifically discusses NBFC dealingwith Equity in Cash/derivative with a centerline purpose of finding market inefficienciesof the market and then using the leverage to generate the profit.An organization IKMInvestors Services Limited has been analyzed and compared with the leader and othercompetitors in this segment.Current IT status , IT bottlenecks and further IT strategy ofthis company are discussed. Finally some Concrete Suggestions for IT Framework in linewith business strategies are given.

Acknowledgment

We would like to express our deep sense of gratitude to Prof. M.L. Singla for hisinvaluable help and guidance during the course of project. We are highly indebted tohim for constantly encouraging us by giving his constructive critics on our work. We aregrateful to him, for having given us the support and confidence.

AuthorsOctober 2007Faculty of Management Studies,University of Delhi

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Contents

1 Industry 11.1 Industry History and Status . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.1.1 Indian Financial System : . . . . . . . . . . . . . . . . . . . . . . . 11.2 What is an NBFC ? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.3 Typical Parameters of the Industry Specific . . . . . . . . . . . . . . . . . 6

2 Organizations in the Industry 82.1 Best-in-class organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82.2 An organization in the industry . . . . . . . . . . . . . . . . . . . . . . . . 9

3 Operations of the Organization & Competitors scenario 103.1 Business Operations of the Organization . . . . . . . . . . . . . . . . . . . 103.2 Competition and its contemporary status . . . . . . . . . . . . . . . . . . . 11

4 IT Operations of the Organization 144.1 IT Implementation Track record . . . . . . . . . . . . . . . . . . . . . . . . 144.2 Current IT status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164.3 Major Bottlenecks in IT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

5 Future scenario 215.1 Future scenario Building for the Industry . . . . . . . . . . . . . . . . . . . 215.2 IT Vision an IT Strategy for the Organization: . . . . . . . . . . . . . . . . 215.3 Strategic Use of IT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255.4 Concrete Suggestions for IT Framework in line with business strategies . . 26

ii

List of Figures

1.1 Financial Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2 Financial System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.3 Growth Path of NBFC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.4 NBFC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

4.1 Network Diagram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

5.1 RTD framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275.2 Black scholes Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

iii

Chapter 1

Industry

1.1 Industry History and Status

Financial System (Bhola, 2004) of any country consists of financial markets, financialintermediation and financial instruments or financial products.The term "finance" in our simple understanding it is perceived as equivalent to ’Money’.Butfinance exactly is not money, it is the source of providing funds for a particular activ-ity. Thus public finance does not mean the money with the Government, but it refersto sources of raising revenue for the activities and functions of a Government.Providingor securing finance by itself is a distinct activity or function, which results in FinancialManagement, Financial Services and Financial Institutions. Finance therefore representsthe resources by way funds needed for a particular activity. We thus speak of ’finance’only in relation to a proposed activity. Finance goes with commerce, business, bankingetc. Finance is also referred to as "Funds" or "Capital" (Tadashi, 1998), when referringto the financial needs of a corporate body.We distinguish between "personal finance" and"corporate finance" i.e. resources needed personally by an individual for his family andindividual needs and resources needed by a business organization to carry on its functionsintended for the achievement of its corporate goals.

1.1.1 Indian Financial System :

The economic development of a nation is reflected by the progress of the various eco-nomic units, broadly classified into corporate sector, government and household sector.While performing their activities these units will be placed in a surplus/deficit/balancedbudgetary situations.

There are areas or people with surplus funds and there are those with a deficit. Afinancial system or financial sector functions as an intermediary and facilitates the flowof funds (figure 1.1) from the areas of surplus to the areas of deficit. A Financial Systemis a composition (Tadashi, 1998) of various institutions, markets, regulations and laws,practices, money manager, analysts, transactions and claims and liabilities.

1

CHAPTER 1. INDUSTRY 2

Suppliers of

Funds

(Households)

Flow of funds (savings)

Flow of financial services

Income and claims

Seekers of funds

(Firms & Govt)

Figure 1.1: Financial Activity

The word "system", in the term "financial system" (figure 1.2), implies a set of com-plex and closely connected or interlined institutions, agents, practices, markets, trans-actions, claims, and liabilities in the economy. The financial system is concerned aboutmoney, credit and finance.Indian financial system consists of financial market, financialinstruments and financial intermediation.

Financial System

Financial

Institutions

Financial

Markets

Financial

Instruments

(Claims, Assets,

Securities)

Financial

Services

Regulatory Inter-

MediariesNon

Inter-Mediaries

Others

Organised

Primary

Banking Non-BankingUnorganised

Secondary

Short

Term

Medium

TermLong

TermPrimary Secondary

Capital

MarketsMoney

Markets

Equity Market Debt Market Derivatives Market

Figure 1.2: Financial System

1. FINANCIAL MARKETS :

A Financial Market (Bhola, 2004) can be defined as the market in which financialassets are created or transferred. As against a real transaction that involves ex-change of money for real goods or services, a financial transaction involves creationor transfer of a financial asset. Financial Assets or Financial Instruments (Tadashi,1998) represents a claim to the payment of a sum of money sometime in the future


and /or periodic payment in the form of interest or dividend.Primarily there arethree kinds of markets, viz.

(a) Money Market

(b) Capital Market

(c) Forex Market

2. FINANCIAL INTERMEDIATION :

Financial intermediation (Bhola, 2004) in the organized sector is conducted by awide range of institutions functioning under the overall surveillance of the ReserveBank of India. In the initial stages, the role of the intermediary was mostly relatedto ensure transfer of funds from the lender to the borrower. Some of the importantintermediaries operating (Tadashi, 1998) in the financial markets include; invest-ment bankers, underwriters, stock exchanges, registrars, depositories, custodians,portfolio managers, mutual funds, financial advertisers financial consultants, pri-mary dealers, satellite dealers, self regulatory organizations, etc.

3. FINANCIAL INSTRUMENTS :

(a) Money Market Instruments

i. Call /Notice-Money

ii. Inter-Bank Term Money

iii. Treasury Bills

iv. Certificate of Deposits

v. Commercial Paper

(b) Capital Market Instruments

(c) Hybrid Instruments

1.2 What is an NBFC ?

As per Sec. 45 I (f) of RBI Act, 1934 ,1956 (RBI, 2007) an NBFC is

1. a Financial Institution

2. has a principle business of receiving deposits under any scheme or an arrangementor lending in any manner

3. approved by central Government and notified by official Gazette


NBFCs are doing functions akin to that of banks (RBI, 2007) , however there are afew differences:

1. an NBFC cannot accept demand deposits

2. It is not a part of the payment and settlement system and as such cannot issuecheques to its customers

3. deposit insurance facility of DICGC ( Deposit Insurance and Credit Guarantee Cor-poration )is not available for NBFC depositors unlike in case of banks

In April, 1999, RBI further announced that identification of an company as an NBFCwill depend on :

• On the assets

• The income pattern of the company

• From the last audited balance sheet, RBI will decide on the principle business ofthe company

A company will be treated as an NBFC (RBI, 2007) if

1. Financial Assets of the company > 50 % of Total Assets of the Company

2. Income from Financial Assets > 50 % of Gross Income

Chronology of NBFC’s regulatory Provisions can be traced as :

1. Chapters III-B, III-C & V of Reserve Bank of India Act, 1934

2. The Miscellaneous Non-Banking Companies (RBI) Directions 1977

3. Residuary non-Banking Companies ( RBI) Directions, 1987

4. Housing Finance Companies (NHB) Directions, 1989

5. Reserve Bank of India (Amendment) Act, March 1997

6. Non Banking Financial Companies ( RBI) Directions, 1998

7. Further amendments time to time

There has been an exponential growth in this sector in India due to following factors :


Figure 1.3: Growth Path of NBFC

• Robust GDP Growth

• Increasing Per Capita Income

• Rising Savings Rate

• Young Population

• Low Penetration

NBFCs Comprises various business Organizations as shown in the figure 1.4.The spe-cific sector taken for the present study Equity in Cash/derivative with a centerlinepurpose of finding market inefficiencies of the market and then using the leverage togenerate the profit.The key components of these organizations are :

1. Hedging

2. Arbitrage

3. High Leverage


NBFC

Hire

Purchase

FinanceInvestment

Activities

Mutual

Fund

Finance

Insurance

Business

Equipment

Leasing

Activities

Loan

Granting

Activites

Housing

Finance

Figure 1.4: NBFC

1.3 Typical Parameters of the Industry Specific

Following are the key performance parameters of the industry

• Financials (Leverage , Profitability etc.)

• Return on Investment (ROI)

• Optimum Fund Utilization

– Aggregate Level

– Individual Level

• Growth Ratio : The rate of growth a company can attain without changing itsprofit margin, assets-to-sales ratio, debt-to-equity ratio, or dividend payout ratio,or without excessive borrowing or issuing new stock.

• Security Transaction Tax : This is applicable at different rates on the value ofthe "taxable securities transaction"

• Margin violation : Warning at 80% utilization of effective deposits of CM withclearing corporation & at 100% level clearing / trading facility is withdrawn

– Clearing member

– Trading member

• Exposure limit Violation : The exposure limit of a Clearing Member exceedshis liquid net worth anytime including trading hours

• Trading Member violation : open position of TM exceeds the Trading Member-wise Position anytime including trading hours


• Client Limit violation : open position of any client exceeds the Client-widePosition limit

• Market Limit violation : open position exceeds the Market-wide Position at anytime including during trading hours

• Violation of Exercised Positions : (When option contracts are exercised by aCM, where no open long positions for such CM/ TM and/ or constituent exist atthe end of the day)

Chapter 2

Organizations in the Industry

2.1 Best-in-class organization

The best-in-class organization in this sector is taken as Reliance Capital Ltd.Usuallycompanies don’t divulge the specific violations in this business , the best-in-class organi-zation has been chosen based in its strong financials as mentioned below :

• Reliance Capital is one of IndiaŠs leading and fastest growing private sector financialservices companies, and ranks among the top 3 private sector financial services andbanking companies, in terms of net worth.

• Reliance Capital has interests in asset management and mutual funds, life andgeneral insurance, private equity and proprietary investments, stock broking andother activities in financial services.

• Consolidated Total Income of Rs 2158 cr (increase of 128%)

• Consolidated Net Profit of Rs 703 cr (increase of 23% )

• Total Income of Rs 884 cr (increase of 36%)

• Net Profit of Rs 646 cr (an increase of 20% )

• EPS of Rs 30.73 (increase of 17%)

• Total Assets Rs. 6,769 cr

• Largest AUM (excess of Rs 650 Billion)

• Largest customer base (3.4 million customers)

• India’s most trusted - ET 2 years in running

• Largest new fund offering over Rs 57 billion from over 900,00 investors

• Only 100% owned Indian private sector mutual fund

8

CHAPTER 2. ORGANIZATIONS IN THE INDUSTRY 9

• 29 schemes- equity, fixed income and money market

• Distribution reach across 300 towns/ cities in India

2.2 An organization in the industry

An organization in this sector is taken as IKM Investors Services Limited The com-pany was founded in 1978 as a small sub-broking unit, with just two people running theshow. Since then it has made tremendous strides, by focusing on customer-first-attitude,ethical and transparent business practices, respect for professionalism, research-basedvalue investing and implementation of cutting-edge technology.

Chapter 3

Operations of the Organization &Competitors scenario

3.1 Business Operations of the Organization

IKM Investors Services Limited provides following services

• Trading in Equities in the cash and derivatives segment (Future and Options) ofNational Stock Exchange (NSE) and Bombay Stock Exchange (BSE)

• Trading in Commodities on Multi-Commodity Exchange (MCX) and National Com-modity Exchange Of India (NCDEX)

• Providing Demat Services on NSDL and CTCL

• Providing trading platform through Net based, V-Sat based, Leased based & Tele-phone based

• Trading as per client convenience

• In-House Arbitrage involving

– Market Making in Index future and Options

– Market Making in Stock Options

– Inter- month spreads in Commodities

In January 2006, The board decided to move from bouquet services provider approachto being a specialized player. The business model was rewritten so as to focus only onproprietary trading and close down the clientele brokerage work. The basic premise wasthat Indian market will grow exponentially in size and one will require economies of scaleto survive in the long run. This will put lot of pressure on small players. The optionavailable for them will be to either scale up operation or create a niche by moving into aspecialized field. IKM decided to move into a specialized player.

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CHAPTER 3. OPERATIONS OF THE ORGANIZATION& COMPETITORS SCENARIO11

3.2 Competition and its contemporary status

Following are the major players in this sector

1. BLB Limited : BLB Limited, incorporated in 1981, a flagship company of the BLBGroup, with its head office at Delhi, and branch offices at Mumbai and Kolkata, isin the business of Stock Trading and holding corporate memberships of BSE, NSE,CSE, DSE, UPSE and dealership of OTCEI. The company has got the rare dis-tinction of having multiple corporate memberships of the premier Stock Exchangesin India together with the status of Depository Participant with both the Depos-itories operating in India namely, National Securities Depository Ltd.(NSDL) andCentral Depository Services (India) Ltd.(CDSL).The equity shares of the Companyare listed at Mumbai, National, Delhi, Calcutta and Ahmedabad Stock Exchanges.

BLB is trying to carve a niche for itself between future and cash markets, afterthe introduction of rolling settlement, future & options in the market which hasthrown open many a challenges before Capital Market Players. The company isemphasizing more and more on information technology, building infrastructure andproviding training to staff so as to internalize the changes and be able to encash onthe opportunities that may arise in future.

The company‘s subsidiary BLBFINWIZ.COM Ltd., is also planning to become afinancial super market for providing services like internet trading, investors’ educa-tion, market news, online market rates, depository, portfolio management, etc.

2. SMC global :

• SMC is one of the leading and experienced brokerage house having its corporateoffice in Delhi , besides offices in Mumbai, Kolkata and a mammoth networkof more than 500 offices spread across the country.

• Member of NSE, BSE, F&O, NCDEX, MCX, DGCX, Clearing Member in NSEDerivative Segment & DGCX and ISO 9001: 2000 certified DP for shares andcommodities.

• Providers of one of the best trading platforms to trade in NSE, BSE, NCDEX,MCX and DGCX.

• have the advanced, hi-tech in-house R&D wing equipped with some of the bestpeople, process and technology resources providing complete research solutionson Equity, Commodities, IPOs and Mutual Funds.

• SMC has expanded, globally by acquiring Trading & Clearing Membership ofDubai Gold and Commodity Exchange(DGCX).


• SMC is contributing one of the highest average daily turnover in NSE, F&O,BSE, NCDEX & MCX.

3. Adroit financial service :

Adroit Financial Services Pvt. Ltd. (Popularly known as "ADROIT") was incor-porated on 6 th April, 1994 to provide financial services, share-broking services andmanagement consultancy services.Today, Adroit is the member of NSE & BSE incapital market segment, member of both the leading commodity exchanges of India(MCX and NCDEX) and Depository Participant (D.P.) of National Securities De-pository Ltd. (NSDL).

Adroit is currently having more than 80 branch offices well spread all over Delhi/NewDelhi, its adjoining cities and other major cities in India. All the branch offices arewell equipped with NSE Trading terminals, trained customer support personnel andother infrastructures.

Infrastructure Facilities include

• Adroit have 56 VSATs and 30 Leased Lines directly connected to NSE tradinghubs.

• It is having more than 300 trading terminals of NSE and CTCL (Computer toComputer Link Facility) operated by NCFM passed well qualified staff.

• It is also having VPN (Virtual Private Network) facility connecting its branchesto Head office.

• All the offices are equipped with latest Computers, Servers and other hard-ware and software. It is having latest Share Broker Accounting package basedon ORACLE Technology provided by M/s Shilpi Computers Ltd., a leadingsoftware provider to share brokers.

• All the branch offices are connected with E-mail facility running on local net-work as well as through internet for fast, smooth and effective communication.

4. Kotak Securities Ltd.: Kotak Securities Ltd. is India’s leading stock brokinghouse with a market share over 9 % as on 30th June 2007. Kotak Securities Ltd.has been the largest in IPO distribution.The company has a full-fledged researchdivision involved in Macro Economic studies, Sectoral research and Company Spe-cific Equity Research combined with a strong and well networked sales force whichhelps deliver current and up to date market information and news.

Kotak Securities Ltd is also a depository participant with National Securities Depos-itory Limited (NSDL) and Central Depository Services Limited (CDSL), providing


dual benefit services wherein the investors can use the brokerage services of the com-pany for executing the transactions and the depository services for settling them.Kotak Securities has 835 outlets servicing over 3,35,000 customers and a coverageof 295 cities. Kotaksecurities.com, the online division of Kotak Securities Limitedoffers Internet Broking services and also online IPO and Mutual Fund Investments.

Kotak Securities Limited has over Rs. 2640 crore of Assets Under Management(AUM) as of 30th June, 2007. The portfolio Management Services provide top classservice , catering to the high end of the market.

As far as multiple corporate memberships of the premier Stock Exchanges and thestatus of Depository Participant are concerned , the company under study is almost atpar with its competitors.The AUM of the company is nowhere near to the other com-panies like BLB Kotak etc. since these companies have gone public issues also, whereasIKM services uses in-house funds (estimated Rs .200-250 cr).This further necessitates tospecialize in the niche market to have and edge.For this newer models and the support ofData warehouse coupled with MIS is needed to generate proper business intelligence.

Accordingly, more emphasis needs to be put on information technology, building in-frastructure and providing training to staff.

Chapter 4

IT Operations of the Organization

4.1 IT Implementation Track record

The company had commenced its operation in the year 1974. At that time their washardly any automation. Every thing was done manually. Trading was conducted on theexchange floors through open outcry system. IKM (IKM, 2005) used to send its autho-rized personnel on to the exchange floor and they use to execute the orders through openoutcry system. The transactions were manually recorded on small pad. The clients orderswere received on small paper chits called "chopri". At day end, all the transactions wererecorded manually into companies’ ledgers. The securities that were traded were all inphysical form. These were also required to be manually fed in the purchase and saleregister. The working was long and tiring and use to extend late in the night as everything needed to be recorded and manually checked. Most of the basic IT infrastructurethat was present was used for basic account keeping and at most drafting letters.

All this changed when NSE started its operation in 1995. The exchange used IT asa means to provide world class services in the Indian securities market. These standardswere unheard of in the Indian Markets. All the processes were automated, from tradingto record keeping, to back-office operations.

IKM was among the first few brokerage house who could foresee the potential benefitof information technology and hence decided to invest heavily on the same.

When NSE started its operations in 1995, IKM (IKM, 2005) was among first few totake its membership. This required lot of investment in IT which at that time requiredlot of belief and vision. Investing on a new exchange using a highly advanced technology,more so managed by technocrats with hardly any capital market experience did not en-thuse much confidence.

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CHAPTER 4. IT OPERATIONS OF THE ORGANIZATION 15

Still IKM decided to go the IT way. The trading operation was the first to be com-puterized as that was prerequisite for trading on the NSE. V-Sat dishes were installed tocommunicate with Exchanges. These were connected to IDU which were then connectedto servers. These were connected to Trading Terminals. One V-Sat was able to supportclose to 7-8 trading terminal without much loss in trading speed. Initially only 2 Disheswere installed, but going by the performance and ease of operation, within one year over50 dishes were installed. A sizable number of these were installed at the companies’ subbrokers offices, as at that time IKM was primarily into brokerage business. It had over400 sub brokers spread all over North India. Prior to establishment of NSE all these weremanaged manually. It required lot of manpower and infrastructure to managed the same.These were connected telephonically to the Delhi office.

With the establishment of NSE, all this changed literally overnight. One was nolonger required to be connected telephonically with the sub-brokers. All that was re-quired was to put a V-Sat at the sub-brokers place. Theses were called clients ID’s. Thesub-broker could put his own hardware, like the IDU, servers and trading terminals andcould commence trading. IKM one the other hand could control the sub-broker’s tradinglimit through Corporate ID that was installed at it centralized office in Delhi. Therewas no need to physically monitor the clients position on minute to minute basis. TheMinute the trading limit was exceeded the terminal would automatically get disconnected.

The second department to be computerized was back office operation. Initially, thetrading details were down loaded form FTP servers in the evening after market close.These were then used to prepare the client wise accounts. Account preparation was donemanually and use to take time. Moreover trading was still done in physical forms. Thisrequired that the physical stock need to be tallied. There was hardly any software thatcould integrate the trading and back-office. The few that were available offered only basicservices.

IKM (IKM, 2005) decided to hire a team of professional programmers. These wererecruited to develop an RDBS solution to the whole setup. These software team underthe guidance of company’s CFO developed an in house software called accountall. In allit took close to 6 month in development and 3 months in implementation.

Accountall offered a complete end to end solution. It had oracle at its backend andthe front end was designed in Visual Basic. Using this customized software, IKM was ableto integrate the trading operations with back office operation. The software was able toimport date from the NSE’s FTP server and generated client wise reports. While earlierit use to take over 7 to 8 hours, it now takes only 1 hour to prepare all the reports (Marginreport, position report etc )


As the exchange evolved and operations increased many integrated software are avail-able off the shelf. Moreover the customized software required constant Updating whichwas not possible with the pace of changes being initiated in the exchange. UltimatelyIKM decided to outsource the back-office operation to Shilpi Computers.

In June 2001, IKM (IKM, 2005) decided to enter into the arbitrage trading. Thisinvolved profiting from pricing inefficiencies existing on various exchanges. This requiredonline calculation using live data from various exchanges. For this the company sub-scribed the services of International Data service provider viz, Bridge Financial Services( in short bridge). Using bridge the live exchange data was linked to an excel based database. This was connected to an application server (AS) containing arbitrage related logicand algorithms for finding out the various arbitrages. It scans the data for all the possi-ble arbitrages that exists. The same is then displayed to dealers through VGA splittersfor execution. This requires cabling the entire arbitrage section with VGA splitters anddisplay cables.As the department expanded, multiple data server provider like Bloomberg, Network 18, E-signal etc are being currently used to act as backup in case of failure of anyone of thefeed software. Latest News, specialized product reports as and when they occur in anypart of the world are displayed instantaneously. Information is Money in the hard pacedStock Market and the investment on these Information systems provide the necessaryedge for competing in the market. And these systems provides the necessary edge.

Moreover multiple application servers were also used. These are dedicated to work onsingle arbitrage logic. These accessed the data from the data servers using DDE. DynamicData Exchange (DDE) is a technology for communication between multiple applicationsunder Microsoft windows and OS/2.DDE is a in-build Feature of operating system. . Bythe use of this feature we can allow Windows applications to share data. Common use ofDDE is to share the data obtained from multiple data service providers with applicationservers, automatic switching in case of failure of data service provider, integrating dateobtained from multiple service provider onto a single display excel sheet. The display ofExcel sheet is customized as per the dealer requirement at the server end.

4.2 Current IT status

The company has established two kinds of network applications

1. Trading network/applications :There are mainly three kinds of trading systems(IKM, 2005)


(a) NEAT (NSE Trading Platform) :It provides trading on the cash and futuresegment on the NSE. It is based on Client/Server architecture with Stratusmain-frame server placed at exchange. These communicate with client PCthrough custom made Software called "Neat" installed in clients PC via VSATor Leased lines. At the server end, all trading information is stored in an in-memory database to achieve minimum response time and maximum systemavailability for users. It was developed by TCS in 1995.

(b) BOLT (Bombay On Line Trading system) :It is one of the few StockTrading systems around the globe, which handles hybrid/mixed mode of trad-ing i.e. Order driven as well as quote driven.

(c) ODINTMIntegrated Application :This is a Multi-Exchange, Multi-SegmentFront Office Trading System based on CTCL (computer to computer Link)trading technology.This allows trading across 5 different markets (NSE-Equity,NSE-Derivatives, BSE-Equity, MCX & NCDEX) on a single screen.ODINŹsupports heterogeneous networks - networks that use a mix of TCP and UDPtraffic

2. Network for in-house analysis : This analyzes the data from various serviceprovider for potential arbitrage This analysis is provided to the companies in housedealers, who then executes the requisite trading strategy as and when it is displayed.The AS uses the services of Real Time Providers of Data / News for getting RealTime Data / reports of the various Exchanges spread across the globe. The followingproviders’ data services are used.

• Bloomberg

• News Wire 18

• E-signal

All these are Excel sheet compatibles.Data from these services are fed to Excel sheetsvia DDE.DDE is a technology for communication between multiple applicationsunder Microsoft windows and OS/2.This is used to share and link the Excel sheetof dealer with the Excel running at server.

Typical Hardware installed in the company is as follows

• P IV systems , VSAT IDU , star topology between departments (Arbitrage , Demat,Back office , Client Area)

• X.25 connectivity ( Packet switched WAN using leased/phone/ISDN)

• Trading servers (SMP servers)

Figure 4.1 shows the overall network diagram of the company.


4.3 Major Bottlenecks in IT

• DDE Limitations :Depending upon the version of Microsoft Windows, followingare the DDE limitations when using Microsoft DDE Links:

– Windows NT: There is a maximum limitation of approximately 14,000 openDDE Links at any given time. If this limitation is exceeded, the DDE sub-system breaks and requires the user to reboot his/her machine.

– Windows 2000: There is a maximum limitation of approximately 10,000 openDDE Links at any given time. If this limitation is exceeded, the DDE sub-system breaks and requires the user to reboot his/her machine.

– Windows 9x: The Windows 9x (95/98/ME) Operating Systems possess a limitto the overall length of all combined DDE links to 48K. The link will break ifthis value is surpassed.

If the limit is surpassed, all future links will not display data and you may encountera "Low on Memory" error message. Each DDE Link cannot be greater than 256characters. This is a Microsoft limitation and can be calculated by adding up allcharacters and spaces in your link.Since we are using Microsoft DDE Links, we have to rely on formats supported bythe DDE system and supported by Microsoft Excel. For various reasons, the mostsuitable data format to be utilized with Excel DDE links is XL Table. However, dueto a 32K limitation of the XL Table, the Historical BLP link is also affected by thesame limitation. However, if you are using the BLP() function in Microsoft Excel2002, or greater, then there is no limitation to the size of your request, other thanthe limitation of Microsoft Excel (see below), as well as your CPU speed, bandwidthand memory. RTD is a new Microsoft technology introduced in Microsoft Office XP.Microsoft Excel – There is a limitation of 65,536 (64K) rows and 256 columns fora Microsoft Excel worksheet. This applies to Microsoft Excel 97, 2000 and 2002.For versions before Excel 97, the maximum number of rows is 16,384 (16K) and 256columns.Besides this DDE has a different function format from standard Excel functions andit can’t use cell references in a function; everything must be hard coded.

• Real time data from these Bloomberg/news wire are linked with customized excelbased spread sheets for real time basis analysis based on the pre-programmed logicfor arbitrage calculation. Results are then displayed to our dealers for further exe-cution through trading terminals. The execution of the trades is done manually bythe dealers.This intelligence operation needs to be automated, because even fractionof second counts these types of transactions.


• Absence of new models for assessment of risk/arbitrage etc.

• Lack of proper Data Warehouse,MIS (Laudon & Laudon, 2006) for whole businessoperations

• Naive security approaches (giving massive losses to company in the past)


Workgroup Switch

Workgroup Switch

Workgroup Switch

Workgroup Switch

PC

PC

PC

PC

lease modem

Exchange

lease server

vsat server

vsat

satellite

lease modem

lease server

vsat server

vsat server

vsat server

lease modem

lease modem

lease server

lease server

Figure 4.1: Network Diagram

Chapter 5

Future scenario

5.1 Future scenario Building for the Industry

• To be a leading player in development of Indian Derivative Market

• To start Hedge Fund Operation within and outside India

• To develop innovative synthetic financial product

• Strength through Research and develop innovative models

5.2 IT Vision an IT Strategy for the Organization:

IT Vision and Strategy (Laudon & Laudon, 2006) guides the development of a reliableinfrastructure across the company.The aim is to provide convenient access to informationand services,convert it into real time intelligence for proper risk assessment and generaterevenue for the company from this generated intelligence.The absence of any concrete ITstrategy has resulted in many difficulties and a waste of resources so far.The IT strategyis delineated under following context and definition.

1. Context :The company is dependent on IT infrastructure for its operations.Apartfrom the intrinsic vulnerability of individual systems (regular backups, the applica-tion of anti-virus software and measures for information security) , they could putthe whole infrastructure at risk.1.1.3 The purpose of the IT strategy is to providea coherent framework for the development of the IT infrastructure by eliminatingunnecessary complexity and duplication and by making the best use of scarce finan-cial resources and staff expertise. The objective is to ensure that the infrastructureserves the "IKM Services" efficiently, reliably and securely.IT strategy should inte-grate with Information Strategy, the Corporate Plan and other policy documents ofthe company.

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CHAPTER 5. FUTURE SCENARIO 22

2. Definition of the IT infrastructure :The infrastructure is defined as comprisingthe following:

• The network - including data cabling (fiber and copper) and active components(routers, switches, and hubs) - and an architecture based on a central back-bone and departmental networks interconnecting central services, departments,remote sites and open-access clusters

• Computing hardware (servers and PCs) together with associated firmware andoperating systems (including network drivers)

• File storage and archival facilities

• Tools to operate the infrastructure (such as network management, directoryservices etc.)

• Database management systems

• Office applications (such as Microsoft Word, Excel, TeX)

• Discipline-specific software (Analysis SW)

• Other Packages

The IT Strategy is a set of guidelines for the development and delivery of IT services.This covers:

1. Central Servers and Storage

• A primary machine room will accommodate all these systems. A secondary ma-chine room will house backup facilities for resilience in the event of problems inthe primary machine room. The secondary computer room will also allow dis-tributed storage of essential information. These machine rooms will be secure,with access restricted to a few authorized individuals. They will be providedwith environmental controls and Uninterruptible Power Supplies.Equipment inthe machine rooms will be physically secured against theft.Regular upgradingof Server in terms of Processing capability and RAM etc will be done.

• For every server, there will be password controls to ensure the security andintegrity of systems management.

• Any changes to production systems will be subject to formal change controlprocedures and will involve thorough testing, documentation and notices tousers.

• The operating system on any central server will not lag more than three yearsbehind the latest release.Latest patches will be regularly applied.

• The services will be expected to be available 24 hours a day, 7 days a weekwithout operator intervention.


• As much notice as possible will be given of planned outages for upgrades andemergency fixes.

• Levels of resilience to failure will be such as to achieve an acceptable balanceof risk versus cost.

• Business continuity and disaster recovery plans will be maintained for all cen-tral servers.

• To enable the swift recovery of critical systems and the restoration of softwareand corporate data in the event of a disaster, incremental backups of all datastored on central servers will be taken daily, with periodic full backups.

• Backup tapes will be kept securely in another fire zone or off-site.

• Consideration will be given to the provision of a new central data backupand archival service for those maintaining local file stores. This will achieveeconomies of scale compared with the separate provision of similar facilities inseveral departments.

• Upgrading of Server in terms of Processing capability and RAM etc.

• The current login mode into the computer is as administrator. The plan is tocreate a user name and password based login to enhance security and betterdata protection.

• Develop an Automatic Server Switch-over policy, which presently IKM doesnot have. The preferred mode of communication with the exchange is throughLease Line. In case the same is down, communication is done using V-satwhich are comparative slower, but more reliable. This switchover requiresmanual configuring the IP address of individual Trading computers, thus istime consuming and at times valuable trading time is lost.

• Gradual conversion from energy consuming CRT based Display units to a moreenergy efficient LCD Monitors

• Development of a system for early detection of faults thereby taking preemptiveaction than proactive approach.

• Provisions are similar for cental systems like proper virus protection, securitypatching, backup and disaster recovery procedures for local systems.

• Clustered approach should be used to manage the PCs

2. Networks

• Reliability, support and maintainability will be major considerations in thechoice of operating systems for both central and local services. ImplementingLinux based server environment entails these features along with better result,robust control and cost reduction.


• The unnecessary proliferation of different operating systems should be avoided.

• Wherever possible and justifiable in terms of cost, the planning of new systemswill be based on open standards to increase the potential for interworkingamong different systems and to reduce dependence on proprietary approaches.

• Every major system will support mechanisms such as XML to facilitate theexchange of structured data.

• Accepted software standards, products will be used.

• Site- or bulk-licenses will be obtained wherever the expected level of use makesthem economical.

• Open source software (i.e. software which is freely available to use, to re-distribute and, if necessary, to modify) will be actively considered as an al-ternative to closed source proprietary software provided that it can supplyequivalent functionality(e.g. Linux as OS , "R" for statistical analysis , Latexfor document preparation etc.)

• All software on computers belonging to IKM or attached to the IKM networkmust be fully licensed.

• Security at the network level will be provided by a combination of methodsincluding Access Control Lists in routers and local and institutional firewalls.

• Installation of Firewalls

3. Software and Standards

• The technology and capacity of the backbone (currently Gigabit Ethernet)will be kept under review with the aim of implementing upgrades as IKM’srequirements evolve and as finances permit.

• Upgrading of Server in terms of Processing capability and RAM etc.

• Upgrading from layer 2 switches into layer 3 Switches and create VLAN tominimize the network traffic.

• Wherever economically feasible, alternative routes will be provided to ensurethe resilience of the network in the event of problems with cabling or activenetwork components

• Data wiring will be progressively extended and upgraded to the current struc-tured UTP (Unshielded Twisted Pair) Category "X" standards as funding per-mits.

• Eventually, it is likely that a single unified cabling scheme will support all formsof communication: data, voice, video, alarms and security

• Local networks will be the responsibility of IT managers.


• Security at the network level will be provided by a combination of methodsincluding Access Control Lists in routers and local and institutional firewalls.

• Installation of Firewall and methods of securing data and proprietary software.

4. Authentication and authorization

• All central systems will be designed to allow the selective enabling or disablingof access to privileged applications for different classes of users.

• Passwords for access to central systems and services will be scanned periodicallyto eliminate those, which could be easily guessed. Users will be forced to changetheir passwords at regular intervals in accordance with best practice advice onsecurity. Old accounts belonging to users who have left IKM will be archivedand deleted within a fixed period of their departure.

• With a single point of sign-on, each user will have just one password and willonly need to quote it once per session to gain access to many systems. Everynew central server will be required to be compliant with these mechanisms, asa minimum.

• Utilities will be provided to achieve cross-authentication and password syn-chronization

5. Miscellaneous

• Standardization and rationalization to avoid duplication of services and theproliferation of ad hoc systems

• Development of a structured approach to any problem rather than an instinc-tive and case-to-case based approach to increase efficiency and reducing downtime.This necessitates the development of proper Data Warehouse and MIS.

• Hierarchical provisioning of essential key services like e-mail ,web etc.

• Provision of IT training

5.3 Strategic Use of IT

Strategic Use of IT would be to design and implement Information technology strategies(Laudon & Laudon, 2006) that deliver greater profitably.This means designing frameworksfor fitting IT into your business strategy and designing business models for strategic useof computing and e-commerce.Following are some of the business strategies needs to berefined / developed.

• Direct dealer order shooting : This currently requires locking of multiple secu-rities in same or different markets( NSE / BSE).


• Put-call parity : Put-call parity is the relationship between the price of a putoption and a call option on a stock according to a standard model. The relationshipis derived from the fact that combinations of options can make portfolios that areequivalent to holding the stock through time T, and that they must return exactlythe same amount or an arbitrage could be available to traders.

• Volatility based strategies : Butterfly , Straddle etc.

• Directional spread : Bull Spread , Bear Spread , vertical Spread , HorizontalSpread

• Index based strategies : Executing order involving a large number of securities(at times involving more than 30 scrip) in one go and simultaneously buying indexfuture.

• Single stroke order shooting

• Program trading : Automating the real time data analysis ,further Locking andFiring the transaction since any Execution delay in these multiple tasks may jeop-ardize the effectiveness of risk model.

• Calculations : Beta calculation, multivariate regression, correlation matrix, co-integration etc for Risk Evaluation

5.4 Concrete Suggestions for IT Framework in line with

business strategies

• Switch from DDE to other faster technologies like Fast DDE , Rapid DDE or newertechnologies like ActiveX,OLE,COM/DCOM,RTD. Real-time data (Thomas, 2007), often referred to as RTD, is data that updates on its own schedule i.e. live data. Itis something that people have tried to construct with previous versions of MicrosoftExcel, but there have been many difficulties and limitations. Microsoft Excel 2002is now designed to handle such data.Examples of Live Data Scenarios include stockmarket data, manufacturing statistics, Web server loads, and warehouse activity.Anequities-trading firm, which wanted to do calculations in Excel based on real-timestock market data earlier experimented with Dynamic Data Exchange (DDE), semi-volatile functions, and other random methods of getting real-time data in Excel 97and 2000. Now that they have Excel 2002, they’re able to get real-time data intoExcel reliably and with the throughput necessary to handle the calculation modelsthey use. RTD offers the following advantages:

– Has Excel function-like syntax.


– Puts the real-time data in a cell.

– Uses cell references as part of the formula.

– Updates in real time.

– Is extremely efficient.

– Does not drop updates; modal dialog boxes shouldn’t have any effect.

– Is able to drive calculation; formulas based on cells that reference real-timedata should update accordingly.

– Keeps track of the state and location of real-time data formulas so that theserver doesn’t have to.

An RTD server (initially MSN R© MoneyCentralTMStock Quotes on the Office Up-date Download Center can be tried for learning purpose) can be a dynamic-linklibrary (DLL), an executable program (EXE) that is executed on your computer, oran EXE that runs on a separate computer. Technically, it is an Automation serverthat implements an extra interface called IRtdServer (Thomas, 2007) that commu-nicates with Excel. So, a dedicated computer is not required, but a computer maybe set aside just for the purpose of running instances of one or more RTD serversthrough DCOM.To build server, typically there is a feed of data (for example, man-ufacturing statistics, stock quotes, Web server loads, and so on). By using MicrosoftVisual Basic R© or Microsoft Visual C++ R©, all that needs to done is build the RTDserver which conceptually translates the language of the feed to a language thatExcel now understands. If there is a need to build an RTD server (figure 5.1) to runon each client’s computer, then any edition of Visual Basic or Visual C++, that canbuild Automation servers, can be used.For an RTD server that runs on a separatecomputer through DCOM, the Enterprize Edition of Visual Basic or Visual C++ isneeded.This architecture is fast, efficient, reliable, and robust. And to top it all off,RTD servers are fairly easy to build.

Figure 5.1: RTD framework


RTD uses a hybrid push and pull mechanism. This effectively gives it all of the ad-vantages of both push and pull mechanisms and none of the disadvantages of eithermechanism.

• Since Windows is a non-preemptive OS , so it is suggested to shift to a lean kernelversion of preemptive Linux which can be customized to run specific applicationsvery fast and without any limitations of Data rate and simultaneous access links tosame data set etc.

• The process of intelligence gathering operation from real time data and then firingthe transactions based on this analysis needs to be automated, because even fractionof second counts these types of transactions.This can be fully automated using threetier architecture of FE Application,Application server and database server.

• Absence of new models for assessment of risk/arbitrage etc is also considered asmajor bottleneck.Black-Scholes option pricing model (figure 5.2) and other newermodels can be used.

Figure 5.2: Black scholes Model

The first part, SN(d1), derives the expected benefit from acquiring a stock out-right. This is found by multiplying stock price S by the change in the call premiumwith respect to a change in the underlying stock price N(d1). The second part ofthe model, Ke−rtN(d2), gives the present value of paying the exercise price on the


expiration day. The fair market value of the call option is then calculated by takingthe difference between these two parts.Based on this various kinds of sensitivitieslike delta,Gamma,Theta,Vega,Rho can be calculated.Since 1973, the original Blackand Scholes Option Pricing Model has been the subject of much attention. Manyfinancial scholars have expanded upon the original work. In 1973, Robert Mertonrelaxed the assumption of no dividends. In 1976, Jonathan Ingerson went one stepfurther and relaxed the the assumption of no taxes or transaction costs. In 1976,Merton responded by removing the restriction of constant interest rates. The re-sults of all of this attention, that originated in the autumn of 1969, are alarminglyaccurate valuation models for stock options.The binomial model breaks down the time to expiration into potentially a verylarge number of time intervals, or steps. A tree of stock prices is initially producedworking forward from the present to expiration. At each step it is assumed thatthe stock price will move up or down by an amount calculated using volatility andtime to expiration. This produces a binomial distribution, or recombining tree, ofunderlying stock prices. The tree represents all the possible paths that the stockprice could take during the life of the option. At the end of the tree ie at expirationof the option, all the terminal option prices for each of the final possible stock pricesare known as they simply equal their intrinsic values.Next the option prices at each step of the tree are calculated working back fromexpiration to the present. The option prices at each step are used to derive theoption prices at the next step of the tree using risk neutral valuation based on theprobabilities of the stock prices moving up or down, the risk free rate and the timeinterval of each step. Any adjustments to stock prices (at an ex-dividend date) oroption prices (as a result of early exercise of American options) are worked into thecalculations at the required point in time. At the top of the tree you are left withone option price.Both these models are based on the same theoretical foundations and assumptions(such as the geometric Brownian motion theory of stock price behavior and risk-neutral valuation).

• The business intelligence operation itself can be strengthened by using proper es-tablishing proper hierarchical (OLAP) cum relational (hybrid) Data Warehouse andComplete MIS by using an intelligent combination of advanced Multivariate Statisti-cal techniques ,OR, Advanced AI Algorithms , Monte Carlo Markov Chain(MCMC)simulation techniques , Artificial Neural Networks and other optimization techniqueslike Genetic Algorithm and Simulated Annealing.

• Once the stronger OS and the MIS is in place , the security policies will be auto-matically strengthened.

References

Bhola, L. (2004). Indian Financial System. Tata McGraw.

IKM (2005). IKM Documents . Internal Report.

Laudon, J. & Laudon, K. (2006). Esentials of MIS . Prentice Hall.

RBI (2007). NBFC Documentation. RBI Report.

Tadashi, E. (1998). The Indian Securities Market . Vision Book India.

Thomas, P. (2007). RTD Documentation. Microsoft.

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