Introduction to Securities Broking Operations: formula sheet

Key formulas

Primary vs secondary market

Primary: issuer → investor (new issue). Secondary: investor ↔ investor (existing securities)

Proceeds reach the issuer only in the primary market.

Market infrastructure institutions (MIIs)

MIIs = Stock exchanges + Clearing corporations + Depositories

Brokers and DPs are intermediaries, not MIIs.

Role mapping

Exchange = trading; Clearing corporation = clearing, settlement and guarantee; Depository = holding and transfer of securities in demat form

Use this to eliminate wrong options quickly.

Participant mapping

Broker → exchange; DP → depository; Clearing member → clearing corporation

Each intermediary connects the investor to one infrastructure institution.

Front office

Front office = client contact + order entry + dealing

Includes dealers, relationship managers and account opening. It is the only part that faces the client and the market.

Middle office

Middle office = risk management + exposure and margin monitoring + surveillance + compliance checks

Sets client limits and watches positions. It does not settle trades.

Back office

Back office = trade confirmation + contract notes + settlement + accounting + records

Handles pay-in, pay-out, ledgers, client statements and reporting.

Broker's capacity

Client trades = agent; own trades = principal (proprietary)

Client and proprietary accounts must be kept separate.

Trading member vs clearing member

Trading member = can trade on the exchange; clearing member = can clear and settle trades with the clearing corporation

A trading member that does not clear itself settles through a clearing member. Some firms hold both roles.

SEBI Act, 1992

SEBI Act 1992 → establishes SEBI and gives it powers to regulate the securities market

Think of it as the law that creates and empowers the regulator.

SCRA, 1956

SCRA 1956 → regulates securities contracts, recognition of stock exchanges and trading in securities

Think of it as the law about exchanges and securities contracts.

Stock Brokers Regulations

SEBI (Stock Brokers) Regulations, 1992 → registration, eligibility, obligations, code of conduct, action for default

This is the main regulation for brokers. It is made by SEBI under the SEBI Act.

Route to becoming a broker

Membership of a recognised stock exchange + SEBI certificate of registration

Both are needed. Exchange membership alone does not allow dealing as a registered broker.

Eligibility theme

Applicant must be a fit and proper person, with required net worth and infrastructure, and not previously disqualified

Know the themes. Do not quote exact numeric limits unless the workbook states them and you remember them.

Trade life cycle sequence

Onboarding (KYC, UCC) → Order placement → Order matching → Trade confirmation (contract note) → Clearing → Settlement

Questions often ask which step comes before or after another. Learn the order.

Order matching priority

Price priority first, then time priority

Best price wins. At equal price, the earlier order wins.

Market order

Executes immediately at the best available price; no price is specified

Execution is likely, but the price is not certain.

Limit order

Buy limit: executes at limit price or lower. Sell limit: executes at limit price or higher

Price is certain, but execution is not guaranteed.

Stop loss order

Trigger price activates the order; the order then executes as a market or limit order

For a sell stop loss, the trigger is usually set below the current market price. For a buy stop loss, above it.

Order validity

Day order: valid till the end of the trading day. IOC: executes immediately, any unfilled part is cancelled

Other validity types may be offered by the exchange. Check the workbook.

Market risk

Market risk = loss from adverse price movement

Cause is a price change in securities, positions or collateral value.

Credit risk

Credit risk = counterparty fails to pay or deliver

For a broker, usually a client default. Also called counterparty risk.

Liquidity risk

Liquidity risk = cannot meet payment on time or cannot sell without large loss

Cash shortage at the time an obligation falls due.

Settlement risk

Settlement risk = trade fails to settle on the due date

Shows up as funds or securities shortage, auction or close-out.

Operational risk

Operational risk = failed processes, people, systems or external events

Includes errors, fraud, system failure and compliance lapses.

Quick revision

• Know the six core parties: investor, stockbroker, exchange, clearing corporation, depository, SEBI.
• The broker is an intermediary. It is not the exchange and it does not hold the securities as a depository.
• The exchange provides the trading platform. The clearing corporation handles settlement obligations.
• A depository holds securities in electronic form. Investors access it through a depository participant.
• SEBI is the securities market regulator and brokers must be registered to operate.
• Order types differ by price and time condition. Match each type to its condition.
• A market order seeks execution at the best available price. A limit order sets a price limit.
• Each step of a trade creates records. Good record-keeping reduces dispute and compliance risk.
• Operational risk comes from failed processes, people and systems. Client risk comes from client default.
• Negative marking is 25% of the marks of the question, so skip a question you cannot narrow down.
• The certificate is valid for 3 years from the date of the examination.

Common mistakes

• Treating stock brokers or depository participants as market infrastructure institutions. Fix: Remember that MIIs are only exchanges, clearing corporations and depositories. Brokers and DPs are intermediaries.
• Saying the issuer receives money when shares are bought on the exchange. Fix: Ask who sold. If an investor sold, the money goes to that investor.
• Placing margin monitoring and exposure limits under back office. Fix: Remember that any task about controlling risk before or during trading belongs to the middle office.
• Saying the middle office settles trades. Fix: The middle office controls risk and monitors. Settlement and contract notes are back office work.
• Mixing up the SCRA and the SEBI Act. Fix: Remember: SEBI Act is about the regulator; SCRA is about exchanges and securities contracts.
• Thinking exchange membership alone is enough to act as a broker. Fix: A broker needs both exchange membership and SEBI registration.
• Saying a limit order is always executed Fix: Remember: limit order gives price certainty, not execution certainty.
• Saying a market order guarantees the price seen on screen Fix: A market order executes at the best available prices in the book, which can differ from the last price.
• Calling a client default a market risk because prices fell. Fix: Ask what failed. If the client did not pay the loss, the risk is credit risk. The price fall itself is market risk.
• Treating liquidity risk and credit risk as the same. Fix: Credit risk is the other party's failure. Liquidity risk is your own shortage of cash or inability to sell quickly.

Exam tips

• Learn the one-line role of each MII and each intermediary; many questions are direct matching.
• Look for 'except' and 'not' in the question stem; these are common trap formats.
• Negative marking applies in this exam, so eliminate swapped-role options before guessing.
• Keep a clear line between regulator (SEBI), MIIs and intermediaries when you revise.
• Learn the three offices as a task list. Most questions give a task and ask for the office.
• Read 'except' and 'not' questions twice. A single wrong word costs marks because wrong answers are penalised.
• Keep the trading member versus clearing member difference clear: trade versus settle.
• Remember that client money and securities must stay separate from the broker's own.