Online Trading: Netting The Gains On The Infoway

Chennai: | Updated: May 22 2003, 05:30am hrs
It has been a rather quiet day for Raman, 24, at the mid-sized software firm where he works. But, he is rather edgy. A browser window with the Net trading portal homepage is a giveaway. He has just purchased 100 shares of Infosys at Rs 3000 and the stock is slipping rapidly.

Raman sells the Infosys shares at Rs 2,800 and takes a hit of Rs 20,000. You have to cut your losses and move out, he says, like a seasoned trader.

Welcome to the world of Internet trading. It is extremely convenient. I cant remember the last time I have been to a brokers office, he notes.

Behind the seamless purchase and sales of stocks on the Internet is a complex set of software and hardware that makes it possible. Also, it requires the bank and the depository participant to be integrated to offer a complete online solution.

At ICICIdirect (a net trading portal) we have put together a robust and highly scalable solution, says ICICI WebTrade Ltd chief technology officer Yagnesh Parikh.

The Software
The software required for an Internet broking system can be divided into three parts - the front office system, the middle office system and the back office component.

The front office system deals with various client facing activities. It handles functions such as order routing and market data announcements. For example, when an order is received, it has to be validated. The validation has to cross various parameters such as the limit of the client and type of security ordered. Once the order is okayed, it is then routed to the exchange for execution.

The front end is a client facing part. Care has to be taken that it is appealing to the user. The usability of the site has to be engineered accordingly, says a software professional associated with the development of a Net broking product.

Also at the front-end varied market data are broadcast to the end user. These could be mundane details such as the stock price and volumes traded. Also, value added informations like the latest corporate news can be provided. The stock data is drawn from the exchange. The other details are got from external data providers. Such interfaces are built into the system, explains the software professional.

In India, there are various software vendors who provide the front end systems. Some net trading providers have also built their own systems. We have a browser based ASP, which has been built in-house, says Mr Parikh of ICICI WebTrade.

The next in the chain is the software that takes care of the middle office processes. These processes are crucial for the success of the broking venture. These include activities such as position monitoring, limits management, margin calculation and exposure management. The positions of various clients are constantly monitored here, such as the level of buying (whether adequate margins are being maintained) and the level of selling (whether there are enough securities available with the client or will he be able to cover the short position). Also, the limit of the brokerage with the exchange is carefully monitored. If the brokerage exceeds its limit with the exchange, some of its trading rights may be cut off.

The last link in the chain are the back office functions of the brokerage. Here, functions such as securities settlement, book-keeping and regulatory requirements are taken care of. The back office software helps undertake complex processes such as settlements. In brokerages, the net positions are settled. That is, the exchange is handed over the securities or cash owed to it, or the brokerage gets the cash or securities as the case may be. Also, the software helps maintain individual accounts for the customers who trade with it.

Communication Layer
The essential features of a stock broking system are the same for various modes of trading. Internet trading is often enabled through a communication layer, which sits on the software and is TCP/IP enabled, thereby facilitating interaction through the Internet.

The communication layer can be tinkered with to handle other forms of communication also. An integrated voice response system (IVR) can be activated through the communication layer. Of course, direct entry by dealers is always available on the system.

Using multiple forms of communication can suit the needs of a diverse range of customers. Also, it can ensure better return on investment on the core investment, says an industry expert.

Software Testing
Usually, any software is put through a range of tests before it is commercialised. In the case of a stock broking solution, stress testing is of extreme importance. Usually, in a stock broking environment orders pile up during particular points of time, which the system should be able to handle. The systems are tested for various levels of activity. Speedy execution of trades is critical to the success of an Internet trading venture, says a software professional involved in testing services.

Back-up & Disaster Recovery
Stock trading involves money, actually lots of money! The data generated is extremely important. Therefore, all large-sized brokerage firms have real-time data back-ups. Also, end-of-the-day data back-ups are made. The better-run brokerages also have disaster recovery sites, where the data is stored in a separate secure location.

Interfaces
A net trading venture cannot exist in isolation. It needs interfaces with other participants such as banks, depository participants (DP) and, of course, the exchange. The bank accounts need to be debited when securities are bought and credited when the securities are sold. Also, DPs (where the shares are held) have to follow a similar process. These interfaces can be online (and many are) thereby weeding out the need for an offline transaction.

Online Contract Notes
The entire stock buying/selling process can now be completed online with the issue of digital contract notes. When a security is purchased or sold, a contract note is issued which states basic details such as the number of securities bought/sold, price and time. This, which earlier was sent to clients in a printed format, is now available in a digital format. Some stock trading portals also store the contract notes on their site for future reference by the clients.

Security
Security is the biggest concern most people have while transacting on the Internet. All net trading portals have 128-bit encryption and access is restricted through user identification and lengthy passwords. It is also possible to authenticate the end user through digital certificates. Also, during the transaction it is almost impossible for third parties to get the data. Data is carefully stored at the broking houses and only those who are are authorised can view select data.