Market Participants and Intermediaries

Participants in the stock market are the diverse entities engaged in the purchase and sale of financial securities. This encompasses individuals, institutional investors, market makers, brokers, and regulators, each fulfilling specific roles. Their actions collectively impact the smooth operation of the market. Stock market participants can be broadly classified into individual investors, institutional investors, brokers, market makers, regulators, and government entities.

Below is a brief overview of some of these entities:

1. Stock Exchanges

• Stock exchanges offer a trading platform for transactions in existing securities.

• Nationwide exchanges such as NSE, BSE, and MSEI facilitate trading through electronic terminals with anonymous order matching.

• Clearing and settlement agencies, along with banks, are appointed by stock exchanges to manage the settlement of funds and securities arising from these trades.

2. Depositories

• Depositories hold securities (e.g., shares, debentures, bonds, government securities, and mutual fund units) in electronic form for investors.

• Investors open accounts with the depository through registered Depository Participants (DPs).

• Depositories offer services related to transactions in dematerialized securities.

• Two SEBI-registered depositories in India are : 

     Central Depository Services Limited (CDSL) and 

                 National Securities Depository Limited (NSDL).

• Depository Participant (DP):

A DP acts as an agent of the depository, facilitating interactions with investors and providing depository services.

Investors, through DPs, can hold and transact in securities in dematerialized form.

While DPs handle investor-level accounts, the depository manages company-level accounts of issued securities.

• Registration as a DP:

SEBI approves the appointment of DPs by depositories.

Entities eligible to register as DPs include scheduled commercial banks, public financial institutions, approved foreign banks in India, state financial corporations, custodians, stockbrokers, clearing corporations/clearing houses, NBFCs, and registrars of an issue and share transfer agents complying with SEBI requirements.

3. Trading Members/Stock Brokers and Sub-Brokers

• Trading Members or Stock Brokers: Registered members of a stock exchange, trading members, or stock brokers facilitate buy and sell transactions for investors on stock exchanges.

• All secondary market transactions must be conducted through the registered brokers of the stock exchange.

• Types of Trading Members: Trading members can be individuals (sole proprietors), partnership firms, or corporate bodies, eligible to join recognized stock exchanges upon meeting minimum practical requirements.

• Sub-Brokers: Sub-brokers, not members of the Stock Exchange, act as agents on behalf of trading members or stockbrokers, assisting investors in buying, selling, or dealing in securities. They extend the reach of brokers to a wider investor base.

• Trade Execution: Trades must be routed through the trading terminals of registered brokers for acceptance and execution on the electronic system.  Sub-brokers in remote locations without electronic facilities may offer trading services via phone or physical order formats, with the main broker entering trades into the system.

• Electronic Transactions: Broker members of exchanges can only complete transactions electronically.

• Proprietary Trade: When brokers trade on their accounts using their funds, it is termed proprietary trade.

• SEBI Registration Requirements: SEBI grants broker registration based on criteria such as adequate office space, equipment, manpower, past experience in securities trading, etc. Brokers must deposit a minimum amount of base capital with the stock exchange, and SEBI limits their gross exposures to multiples of their base capital.

• Brokerage and Commission: Brokers earn a commission, known as brokerage, for their services. Individual stock exchanges set the maximum brokerage chargeable to customers.

• Additional Services: Some brokers offer research, analysis, and advice about securities to their investors.

 

4. Authorized Person

• Authorized Persons: Individuals, partnership firms, LLPs, or body corporates appointed by a stockbroker or trading member to act as agents reaching out to investors nationwide.

• Appointment Process: Stockbrokers can appoint one or more authorized persons, subject to obtaining specific prior consent from the relevant stock exchange for each individual.

• Approval Scope: Approval and appointment of authorized persons are specific to a defined segment of the exchange.

5. Custodians

• A custodian is responsible for holding funds and securities for its major clients, often institutions like banks, insurance companies, and foreign portfolio investors.

• Beyond safeguarding securities, a custodian also handles transaction settlements and maintains records of corporate actions on behalf of its clients.

• It aids in maintaining a client's securities and funds account, collecting benefits or rights related to held securities, and keeping clients informed about actions taken or planned for their portfolios.

6. Clearing Corporation:

• Clearing corporations are essential to safeguarding investors' interests in the securities market.

• They ensure Stock Exchange members fulfill obligations to deliver funds or securities.

• Acting as a legal counterparty, these agencies guarantee the settlement of all transactions on stock exchanges and can be part of an exchange or a separate entity.

7. Clearing Banks:

• Clearing banks play a crucial role as intermediaries between clearing members and the clearing corporation.

• Every clearing member is required to maintain an account with the clearing bank.

• Clearing members ensure funds are available in their clearing bank account on a pay-in day to meet obligations from stock exchange trades.

• On the pay-out day, clearing members receive the amount in their clearing bank account.

8. Merchant Bankers

• Registered with SEBI, merchant bankers function as issue managers, investment bankers, or lead managers.

• They serve as a single-point contact for issuers during new security issues, evaluating capital needs, designing instruments, participating in pricing, and overseeing the entire issuance process until securities are listed on a stock exchange.

• Merchant bankers collaborate with other stakeholders, such as registrars, brokers, bankers, underwriters, and credit rating agencies, to facilitate the issuance process.

9. Underwriters

• Underwriters play a crucial role in the primary market by committing to subscribe to any unclaimed portion of a public offer of securities.

• They provide assurance to issuers that if public demand falls short, they will purchase the remaining securities.

• Initial commitments made during the IPO are termed complex underwriting, while soft underwriting occurs after pricing is determined, often involving the placement of shares with other financial institutions to mitigate risk.

• Soft underwriting includes the option to exit the commitment under specific circumstances, reducing the risk compared to rigid underwriting.

Key Takeaways:

• Market Participants: Diverse entities like investors, brokers, and regulators, broadly categorized into individual investors, institutional investors, brokers, market makers, regulators, and government entities.

• Stock Exchanges: platforms for trading securities, with electronic terminals and appointed clearing agencies for settlements.

• Depositories: Hold securities electronically; investors open accounts through Depository Participants. CDSL and NSDL are registered depositories.

• Depository Participant (DP): Acts as an agent, facilitating investor interactions. SEBI approves DP appointments; eligibility criteria for entities.

• Trading Members/Stock Brokers, and Sub-Brokers: Registered members facilitate transactions; sub-brokers act as agents. All transactions are through registered brokers.

• Authorized Person: Appointed agents reaching investors nationwide; approval specific to a defined exchange segment.

• Custodians: Hold funds and securities, ensure settlements, and maintain records for clients.

• Clearing Corporation: Safeguard investor interests, ensure obligation fulfillment, and act as a legal counterparty.

• Clearing Banks: Intermediaries between clearing members and corporations. Clearing members maintain accounts for settlement funds.

• Merchant Bankers: Registered with SEBI, single point of contact during security issues, and collaborate with stakeholders.

• Underwriters: Commit to subscribing to unclaimed portions of public offers, providing assurance to issuers. Complex and soft underwriting involve commitments during an IPO and post-pricing, respectively.

Frequently Asked Questions

1. What entities engage in the activities of the stock market?

Market participants are entities engaged in buying and selling financial securities, including individuals, institutional investors, market makers, brokers, regulators, and government entities.

 

2. What are the intermediaries in the primary market?

Primary market intermediaries are facilitators of initial public offerings, such as share transfer agents, registrars, merchant bankers, underwriters, credit rating agencies, and custodians.

 

3. Who are the four participants in the stock market?

Typical stock market participants are retail and institutional investors, traders, market makers (MMs), and specialists maintaining liquidity and providing two-sided markets.

 

4. What are the intermediaries in the secondary market?

Secondary Market Intermediaries: Include advisory service providers, brokers (commission brokers and security dealers), and financial entities like non-banking financial companies, insurance companies, banks, and mutual funds.

 

5. Who are capital market intermediaries?

Capital Market Intermediaries are entities facilitating transactions in the capital market for issuing companies and investing investors.