Stock Market Membership, Organization

1. Floor brokers

They execute orders for members (brokers) and receive a share in the brokerage commission that a commission broker charges to his client.

2. Commission brokers

They execute orders of their customers by buying and selling securities on the exchange. They charge a specified commission on the purchase or sale value. A commission broker does not buy or sell securities in his own name. They deal with many clients and consequently with many securities.

3. Jobbers

They are professional independent brokers engaged in buying and selling of specified securities in their own name. Jobbers cannot deal on behalf of public and are barred from taking commission. They deal with brokers who in turn transact on behalf of the public. A jobber deals in a limited number of securities which he tracks regularly.

Jobbers generally quote two prices, one at which he is prepared to purchase and the other at which he is prepared to sell a security. This two way price is known as ‘double-barrelled price‘. The difference between the two prices is known as the ‘Jobbers turn‘. For e.g. a Jobber may quote the shares of XYZ at Rs.500-501.

This implies that the jobber is prepared to purchase the shares at Rs. 500 each and sell at Rs.501 each. The difference between the two prices is the jobbers turn.

4. Tarawaniwalas

A tarawaniwala can act both as a broker and jobber. The tarawaniwala might act against interests of investors by purchasing securities from them in his own name at a lower price and sell the same securities to them at higher prices. To prevent this, the Securities Contract (Regulation) Act of 1956 provides that a member of a stock exchange can act as a principal only for a member of a recognized stock exchange.

5. Odd Lot dealers

They specialize in buying and selling of securities in odd lots. They buy odd lot units at a lesser price

6. Badliwalas

They are financiers who facilitated the carry over business by financing carry-over transactions. They earn interest for the amount financed (badla).

7. Arbitrageurs

Arbitrageurs keep a close watch on the prices of shares in different markets. They buy shares in markets where their price is low and sells them in markets where their price is high. For e.g. if a share of XYZ is quoted at Rs.2,000 in Bangalore stock exchange and at Rs.2,100 in Madras Stock exchange, the arbitrageur will buy shares in the Bangalore stock exchange and sell them in the Madras Stock Exchange. He would be earning a profit of Rs. 100 per share.

8. Sub-brokers/Remisiers

Sub-brokers are agents of stock brokers. Since they are not members of a stock exchange, he cannot directly deal in securities. He helps clients to buy and sell securities only through the stock broker. In the Bombay Stock Exchange the sub-brokers are termed as ‘Remisiers‘. They receive a share in the brokerage commission that a commission broker charges to his client.

Eligibility requirements to become a stock exchange broker

1. Persons desiring to become brokers should clear the written test and interview conducted by stock exchanges.
2. They should possess the required financial strength to fulfill capital adequacy norms.
3. They should have the required infrastructure (buildings, computer systems, connectivity)
4. They should have the required manpower to service investors.
5. They should adhere to the code of conduct and various regulations prescribed while conducting trade.
6. They should provide regular updates to the stock exchanges regarding their net worth, information relating to directors, partners etc.

Organisation and Working of Stock Exchange:

Practically, the organisation and working of a stock exchange differs from exchange to exchange in technical details although the general pattern of all exchanges is almost the same.

The general pattern of a stock exchange is noted:

(a) Constitution:

It is an association of members which may be a voluntary and non­-profit association or company limited by shares or guarantee.

(b) Membership:

Membership is a ‘must’ for transacting business since non-members are not allowed to enter the stock-exchange. Membership is strictly limited, i.e., no one is allowed to be a member unless there is a vacancy. Membership is acquired outright by the payment of membership fees prescribed by the stock exchange.

(c) Management:

The general administration of a stock exchange is administered by a committee of management and is called by different names in different exchanges. The selected Executive Committee of different stock exchanges carries on management of their day-to-day activities through sub-committees such as Listing Committee, Defaulters’ Committee, Arbitration Committee, etc.

(d) Nature of Transactions:

Two types of transactions cash or forward are made in a stock Transactions exchange. Cash transaction is one which reveals the delivery of securities within a short time which is settled by the payment of price. This type of transaction is also known as investment transaction since it is based on bona fide intention of purchase and sale of securities. On the contrary, a forward transaction is one which reveals forward delivery contracts and fixed settlement days. It is a speculative transaction and the settlement is made by the payment of price differences.