The trading system: from trading floor to screens
Long ago, traders stood in a trading ring (floor) and shouted prices (open outcry). Today almost all exchanges use screen-based trading: an online, fully automated system.
- Investors place orders with a broker (a registered member of the exchange) by app, website or phone.
- The broker's terminal sends the order to the exchange's central computer.
- The computer keeps all waiting orders in an order book and matches them automatically. This is an order-driven market.
- Every order and trade is visible on screen, so the system is transparent, fast and fair for investors in any city.
Some markets also have market makers who always quote a buy and sell price (a quote-driven market).
The order book and how orders are matched
A bid is a price at which someone wants to buy; an ask (or offer) is a price at which someone wants to sell. The highest bid and the lowest ask are the best bid and best ask. The difference between them is the spread.
Price-time priority
- Price first: the best price is served first (highest buy, lowest sell).
- Then time: among orders at the same price, the one placed earlier trades first.
When a new buy order's price is equal to or higher than the best ask, a trade happens. The price at which it happens is the last traded price (LTP).
Order types
Based on price
- Market order: buy or sell immediately at the best price available. Sure to trade (if there are opposite orders), but the price is not known in advance.
- Limit order: buy at or below, or sell at or above, a price you set. You control the price, but it may not trade.
- Stop-loss order: an order that becomes active only when the price reaches a trigger price. It is used to limit a loss (or protect a profit). A stop-loss can then become a market order (SL-M) or a limit order (SL-L).
Based on time (validity)
- Day order: valid till the end of the trading day, then cancelled.
- IOC (immediate or cancel): trade whatever is possible at once; cancel the rest.
- GTC / GTD (good till cancelled / date): stays until you cancel or until a date.
Based on quantity
- Disclosed quantity: only part of a big order is shown in the book.
- All or none: trade the full quantity or nothing.
Trading hours, circuits and settlement
- Pre-open session: a short period before the market opens where orders are collected and one opening price is found.
- Normal session: continuous matching (for example 9:15 am to 3:30 pm in India).
- Circuit breakers / price bands: if prices move too much in one day, trading in a share or the whole market pauses to stop panic.
- Contract note: the broker sends the investor a record of each trade.
- Clearing and settlement: the clearing corporation makes sure the buyer gets shares (in a demat account) and the seller gets money. Many markets now settle on T+1 (one working day after the trade day T) or T+2.
Key formulas and definitions
- Spread = best ask − best bid
- Matching rule: price priority, then time priority
- Trade happens when buy price ≥ sell price
- Average price = total money paid ÷ number of shares
Worked examples
1. Best bid ₹249.50, best ask ₹250.25. Find the spread.
Spread = 250.25 − 249.50 = ₹0.75.
2. Sellers in the book: 5 shares at ₹100, 8 at ₹101. You place a market buy for 7 shares. What do you pay in total and on average?
5 × 100 = 500 and 2 × 101 = 202. Total ₹702. Average = 702 ÷ 7 ≈ ₹100.29.
3. You place a limit buy at ₹98 when the best ask is ₹100. What happens?
No trade, because no seller is at ₹98 or lower. Your order waits in the bid queue until a seller comes down to ₹98 or you cancel.
4. Two buy orders at ₹99: A placed at 10:01, B placed at 10:03. A seller at ₹99 arrives for 4 shares; A wants 3, B wants 5. Who gets what?
Same price, so time decides. A gets 3 shares, B gets the remaining 1 share.
5. You bought at ₹500 and set a stop-loss at ₹470. The price falls to ₹470. What happens and what is the loss per share (ignore fees)?
The trigger is hit, so a sell order is sent. If sold near ₹470, the loss is about ₹30 per share instead of a bigger loss if the fall continues.
6. A trade is done on Monday. When is it settled under T+1 if Tuesday is a working day?
On Tuesday (one working day after the trade day).
Common mistakes
- Thinking a limit order always trades: it trades only if the market reaches your price.
- Assuming a market order gets the price you saw: a large market order may eat several price levels.
- Thinking a stop-loss is active at once: it waits until the trigger price is touched.
- Ignoring time priority: at the same price, the earlier order is filled first.