Consider the following statements about trading on a stock exchange:(…

Consider the following statements about trading on a stock exchange:

(A) In screen-based trading, the computer in the broker’s office constantly matches the orders at the best bid and offer price.

(B) In screen-based trading, orders that are not matched are cancelled at the end of each trading hour.

(C) Screen-based trading increases the efficiency of operations, since there is a reduction in time, cost and risk of error.

(D) Under the open outcry system, deals were struck among investors on the floor of the stock exchange.

(E) In screen-based trading, all the trading centres spread over the country are brought onto one trading platform.

Which of the statements given above are correct?

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → (A), (C) and (E) only

(A) In screen-based trading, the computer in the broker’s office constantly matches the orders at the best bid and offer price. — Correct. Orders are matched at the best bid and offer price all the time.

(B) In screen-based trading, orders that are not matched are cancelled at the end of each trading hour. — Incorrect. Unmatched orders remain on the screen. They stay open for matching during the day.

(C) Screen-based trading increases the efficiency of operations, since there is a reduction in time, cost and risk of error. — Correct. Deals are done faster, cheaper and with fewer mistakes.

(D) Under the open outcry system, deals were struck among investors on the floor of the stock exchange. — Incorrect. Deals on the floor were struck among brokers. Prices were shouted out, and shares went to the highest bidder.

(E) In screen-based trading, all the trading centres spread over the country are brought onto one trading platform. — Correct. Business goes on at the same time in all centres, so they share one trading platform on the computer.

NCERT (Pre-rationalised Edition): “TRADING AND SETTLEMENT PROCEDURE … There was a time when in the open outcry system, securities were bought and sold on the floor of the stock exchange. Under this auction system, deals were struck among brokers, prices were shouted out and the shares sold to the highest bidder. …”

“TRADING AND SETTLEMENT PROCEDURE … Every broker has to have access to a computer terminal that is connected to the main stock exchange. In this screen-based trading, a member logs on to the site and any information about the shares (company, member, etc.) he wishes to buy or sell and the price is fed into the computer. The software is so designed that the transaction will be executed when a matching order is found from a counter party. The whole transaction is carried on the computer screen with both the parties being able to see the prices of all shares going up and down at all times during the time that business is transacted and during business hours of the stock exchange. The computer in the brokers office is constantly matching the orders at the best bid and offer price. Those that are not matched remain on the screen and are open for future matching during the day. …”

“TRADING AND SETTLEMENT PROCEDURE … Electronic trading systems or screen-based trading has certain advantages:
1. It ensures transparency as it allows participants to see the prices of all securities in the market while business is being transacted. They are able to see the full market during real time.
2. It increases efficiency of information being passed on, thus helping in fixing prices efficiently. The computer screens display information on prices and also capital market developments that influence share prices.
3. It increases the efficiency of operations, since there is reduction in time, cost and risk of error.
4. People from all over the country and even abroad who wish to participate in the stock market can buy or sell securities through brokers or members without knowing each other. That is, they can sit in the broker’s office, log on to the computer at the same time and buy or sell securities. This system has enabled a large number of participants to trade with each other, thereby improving the liquidity of the market.
5. A single trading platform has been provided as business is transacted at the same time in all the trading centres. Thus, all the trading centres spread all over the country have been brought onto one trading platform, i.e., the stock exchange, on the computer. …”