Chapter 1

1.1 - Introduction
The prime purpose of this study is to identify the different functions of information technology in stock exchange and also to focus on the most common operations of the stock exchange. The stock exchange is an essential facet of worldwide economy. Without an efficient and well running stock exchange in which consumers could quickly and easily trade assets the global economy could swiftly grind to a halt. Stock Market Exchanges continue to play an integral role in global capitalism. Competition between Exchanges is becoming an increasingly interesting phenomenon, and with modern technology making the world into a global village, competition has no geographical borders1. The financial services world is subjugated by the role of the stock exchange in any given national economy. National and global markets persuade politics, social policy and the lives of millions - often directly. Therefore, this report seeks to explore the role of modern information technology in Stock exchange. Information technology is extremely important in both financial and economic sectors. IT plays a major role in the management and upkeep of huge amount of information for businesses. It also helps in creating information as well as aids in the information exchange. Increasing the development expansion of of computer science technology, lead IT to has IT one appearance of the beside new of

telecommunication

infrastructures.

human

technologies not only affected by deep transformations but also it is affecting on human life patterns quickly and it is an important growth factor and a device of other sectors too. Especially in Financial Services Information Technology has played a major role in past few decades make the everyday operations within financial services sector easier and more efficient for both consumers and the business itself.

http://www.stockmarkets.com/exchanges/

1.2 The Stock Exchange

A stock exchange is a place to regulate and perform the activities of stock (equity) market. It is considered as a barometer of the economy, because of its immediate and visible reaction on the news and transactions of economic importance. In common words a stock exchange sells and buys stocks, shares, and other such securities. In addition, the stock exchange sometimes buys and sells certificates representing commodities of trade (How the Stock Exchange works, Whetnall, N p9). The Stock exchange serves many purposes for the consumers, businesses and also for the economy as a whole, one of the key function of the exchange is to provide a platform for the companies which are just entering the market and also the organisations which are in the market for longer period of time to help them raise funds through issuing of shares. It is a free market because the prices of securities move in response of supply and demand. Another significant purpose of the stock exchange is to provide flexibility/liquidity for the free flow of capital. The majority of stock markets also trade derivatives, corporate bonds and government securities. Some exchanges (mercantile) trade futures contracts and options on commodities (Kiyosaki, p79). The Stock Exchange, while providing a resourceful and transparent market for trading in securities upholds the interests of the investors and ensures resolutions of their grievances. Stock exchanges perform important roles in national economies and many economists believe that Stock exchange of and economy of the country supports each other. The stock exchange ups and down usually shows the strength of the economy and the stages of development (www. actrav.itcilo.org). The stock exchanges co operate a governing role in accelerating the pace of economic development of a country by instigating a range of steps like providing ready market for trading and evaluation of securities, ensuring the availability for liquidity of capital, mobilizing surplus savings, helping raising new capital, provide platform for public debt and act as a clearing house of business information (Godin, P39). The exposition above leads us to the important fact that the stock exchange acts as a connection for investors to the companys profits. Because of this particular intermediary, less time,

paper work and stress is required to become a part of any given company. Some major stock exchanges around the world are: New York stock exchange (NYSE), NASDAQ and London (LSE). Heres the federations list of the worlds 10 biggest stock markets by market capitalization (in billions of dollars) as of June 2010.

Table 1.1 - World's biggest stock exchanges by market capitalization

Source: www.world-exchange.org

The biggest stock markets at present are in the USA, Japan, UK and EU as showed in table 1.1. These exchanges appear to be existing in global indices that reflect the general situation of the global economy. These stock markets also have different ownership structure in the different countries. Tow out of top 4 exchanges NYSE and LSE will be discussed in a brief detail.

New York Stock Exchange (NYSE): NYSE dates back to 1792, when the Buttonwood Agreement would be signed between 24 stock brokers under the buttonwood tree, on Wall Street. In 1817, this trading bazaar has signed it own code of ethics and called itself New York Stock and Exchange Board, that at present has been shorted for NYSE (Colbert, D p73). NYSE has occupied its current building on famous Wall Street since the turn of the century. Decades of growth and innovation the NYSE remains the world's foremost securities marketplace. Over the years its commitment to investors has been resolute and its constant application of the latest technology has allowed it to maintain a level of market quality and service that is unparalleled. The NYSE has grown to become the global marketplace of today. In 2010 stocks from about 3,000 companies were listed, with a collective market value of about $16 Trillion. The exchange charges companies an initial listing fee and also an annual listing fee which is based on the number of shares. New Companies have to meet certain minimum requirement to apply for the listing in NYSE which is also known as the exchange which trade in most liquid shares globally. Some of those requirements are: (Kiyosaki, 81) The number of shareholders Trading activity The number and value of shares held in public hands Annual earnings

The fundamental business of the exchange is to attract and process order flow to manage that order flow, NYSE deals with the trade of following instruments: Debt securities. Government securities (local and federal) Corporate bonds Commercial papers Debt certificates.

Equity securities as represented by the stocks of companies. Derivatives as represented by options, futures contracts, swaps, caps, convertibles, etc Others: Certificates of deposit, short-term papers, indices, and other instruments that are created by the companies. (Geisst, 210)

The exchange trades approximately 1.46 billion shares on a daily basis and recorded its record volume day in 2007 where it sold 4,121,107,134 shares. On August 2, 2004, it expanded so that orders could be sent via electronically which drastically increased electronic trades (http://www.nyse.com). NYSE is usually considered as the most important exchange globally. The London Stock Exchange (LSE) The London Stock Exchange is one of the worlds oldest stock exchanges and can trace its history back more than 300 years. Starting life in the coffee houses of 17th century London, the Exchange quickly grew to become the Citys most important financial institution. Over the centuries following, the Exchange has consistently led the way in developing a strong, well-regulated stock market and today lies at the heart of the global financial community (Morgan, V. 1969, p11). LSE has become one of the worlds largest and most international stock exchanges, playing a critical role in the development of global capital markets. It offers the widest choice of routes to market which are available to both British and international companies. According to 2010 annual report, It lists over 3,000 companies and with 350 of the companies coming from 50 different countries (www.londonstockexchange.com). LSE operates two primary markets, the Main Market and the Alternative Investment Market (AIM). The Main Market: The Main Market is an equity market of the London Stock Exchange (LSE), it is usually reserved for more established or high performing businesses, and can have strict requirements that a company must fulfil when listing your business on the stock market. The key advantage from listing the business on the Main Market is that investors can buy shares in business, which can increase

business capital and, in turn, the business profile. However, the Main Market may not be suitable for all businesses. There are certain requirements that any business must meet i.e. reporting obligations and companys management should assess these factors before consider joining2. Approximately 1,800 of the LSE's company listings trade on the Main Market, and the total market capitalization is over 3,500 billion. Alternative Investment Market (AIM): The Alternative Investment Market (AIM) was set-up in 1995 as a sub-market of the London Stock Exchange. AIM enables smaller companies to obtain a public listing for their shares at a fraction of the cost and with less regulation than on the main market. Over 3,000 companies have been listed on AIM since it opened. The AIM market was originally aimed at UK companies, but today it plays host to hundreds of overseas companies, from Canadian oil explorers to Chinese technology start-ups. These companies have undertaken a listing on AIM partly because of greater regulation elsewhere in the world, but also because a London-listing gives them exposure and potentially access to a large pool of international finance.

http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1087240450&lang=&type=RESOURCES

Chapter 2
The Impact of Information Technology on Stock Exchanges:
In this era of advance information technology all Financial institutions increasingly use technology to operation smoothing, commercial and service activities, service development and improvement, risk reduction decreasing the cost of deals. These institutions transfer and distribute the risk by using service information networks facilities, more efficiently (Damodaran1985, p427). Information technology is playing a considerable role in stock exchanges for past few decades. Newly developed technology has made life very easy and simpler for the investors and traders. Information technology has helped stock exchanges to be more dynamic a productive. Investors and traders can buy or sell the stock and also make the investments with the click of mouse. Organisations can see the exact status of their stock in very short or live time just with the help of IT. Increase of consistency, stabilization and reinforcement of market and governmental organization, also transformation in technology and inspecting environment, change the competitive criterion in stock exchange industry (Arnold and etal.,1999). The Usage of IT in stock Exchanges: According to National Association in Capitalization (NAIC), private investors rate the internet and more specifically different websites of exchanges and also more recent comparison websites in the first place as a source of information for investing. Because people can study annual reports of companies and analysis of analyst, adopt specifications stock, and engaged in business operations by visiting different websites. Using electronic networks to data, production, service and money exchanging between people (consumers) and companies, companies with each others, peoples with each others, citizens and governments, and at last companies and governments, is called electronic financial services (Emami A, 1997). Information technology and more specifically Internet (World Wide Web) has introduced a way for consumers and investors to manage their funds online. IT and modern telecommunication infrastructure has transformed the

way stock exchange and investment companies conduct their businesses. Reasons of applying electronics financial services in stock exchanges are: Quick development of electronic exchange The portion of stocks that exchanged by direct electronic exchange in industrial countries has reached 90% from 28% in 2007. Intense change in financial structure and nature Electronic financial services by inputting external suppliers with internal suppliers cause cost reduction and augmentation of competition in this sector (Hal Varian1998). Globalization of investment and stock exchanging process IT causes capital establishment and stock exchanging transferred to the international financial centres. Result of these matters is intense augmentation of capital establishment and stock exchanging contribution, especially in new markets. Normal level of capital establishment for partnership in international markets increased from 5 billion dollar in 1990 to 30 billion dollar in 2000 (Broker 1991). Recognition and Contemplation In stock exchanges most of the Information technology is allied with stock quotes and trade settlement. Stock Tickers3 track share prices, volume of shares and also individual trades on regular basis. Traders on the stock exchange floor use IT to verify stock quotes. IT has also reduced the cost of trading through sheer competition. Further, information technology provides for program trades. Program trades are computer algorithms designed to strip away emotion from the investment process.

A stock ticker is a running report of the prices and trading volume of securities traded on the various stock exchanges. A tick is an up or down movement in the sale price of a security. (www.nasdaq.com)

Algorithmic Trading
Technological changes have revolutionized the way financial assets are being traded. All the steps of trading process, from comparing stock prices to an order entry to trading venue to a back office of the exchange is all exceedingly automated. Because of this automated trade there has been dramatically reduction in the costs incurred by Financial Intermediaries. Algorithmic trading (AT) is a dramatic example of this far-reaching technological change. Many market participants now employ AT, commonly defined as the use of computer algorithms to automatically make certain trading decisions, submit orders, and manage those orders after submission (Jovanovic and Menkveld 2010). These programmes are extremely beneficial to trading firms in many ways, specifically that the algorithmic trading software is fed with live data and is able to analyze that data before a human trader is even aware that that new information is available. Before AT took hold, a pension fund manager who wanted to buy 30,000 shares of IBM might hire a broker-dealer to search for a counterparty to carry out the entire quantity at once in a block trade. Alternatively, that institutional investor might have hired a New York Stock Exchange (NYSE) floor broker to go stand at the IBM post and quietly work the order, using his judgment and discretion to buy a little bit here and there over the course of the trading day to keep from driving the IBM share price up too far. As trading became more electronic, it became easier and cheaper to replicate that floor trader with a computer program doing AT. Now virtually every large brokerdealer offers a suite of algorithms to its institutional customers to help them execute orders in a single stock, in pairs of stocks, or in baskets of stocks (Hendershott, Terrence, and Ryan Riordan, 2009)

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