NISM-Series-VII: Securities Operations and Risk Management · Market Participants in the Securities Market

Stock Exchanges and Trading Members for NISM Series VII

Updated 11 October 2026 · Fact-checked

A stock exchange is a SEBI-regulated marketplace where securities are traded under its rules. Trading members buy and sell on the exchange. Clearing members settle those trades through the clearing corporation. To answer MCQs, first decide whether the question is about trading, clearing or settlement, then match the role to the right entity.

Understand Stock Exchanges and Trading Members

A stock exchange is an organised market where buyers and sellers trade securities under fixed rules. It provides a transparent trading platform, price discovery, liquidity, and a set of rules that members must follow. In India, exchanges are recognised and regulated by SEBI. Examples are BSE and NSE.

Only admitted trading members can place orders on the exchange. These are usually stockbrokers. Investors do not trade directly on the exchange. They trade through a trading member, who is registered with SEBI and admitted by the exchange. The exchange can inspect members, set conduct rules, and act against those who break them.

Trading and settlement are different jobs. Trading means matching orders. Settlement means delivering securities and paying funds. The clearing corporation handles clearing and settlement. It acts as the central counterparty and guarantees settlement through novation, which means it becomes the buyer to every seller and the seller to every buyer. It works through clearing members, who are the entities that take on the obligation to settle trades with it.

A trading member may also be a clearing member. A trading-cum-clearing member (TCM) clears and settles its own trades, its clients' trades and the trades of other trading members. A self-clearing member (SCM) clears and settles only its own trades and its clients' trades. It does not clear for other trading members. The test that separates them is whether the member clears for other trading members: a TCM does, an SCM does not. Some trading members do not clear at all. They depend on another member to settle for them. A professional clearing member (PCM) is a clearing member that does not trade. It only clears and settles trades, for trading members and custodial clients.

The NISM classification is: trading member (trades only, does not clear), trading-cum-clearing member (clears its own trades, its clients' trades and other trading members' trades), self-clearing member (clears only its own trades and its clients' trades, not for other trading members), and professional clearing member (clears only, does not trade, and clears for trading members and custodial clients).

Key formulas to remember

Trading member: Trading member = admitted by the exchange to trade, registered with SEBI as a broker; Can place orders. Needs a clearing member to settle if it is not a clearing member itself.
Trading-cum-clearing member: TCM = clears own trades + clients' trades + other trading members' trades; Clears and settles its own and its clients' trades with the clearing corporation, and also clears for other trading members.
Self-clearing member: SCM = clears only own trades + clients' trades; Does not clear for other trading members. This is the difference from a TCM.
Professional clearing member: PCM = clears only, does not trade; Clears trades for trading members and custodial clients.
Exchange vs clearing corporation: Exchange = trading platform; Clearing corporation = clearing and settlement, as central counterparty through novation; Through novation, the clearing corporation becomes the buyer to every seller and the seller to every buyer, and so guarantees settlement. Do not mix the two functions in an answer.

How to solve Stock Exchanges and Trading Members questions

Use this method for any question on exchanges, trading members or clearing members.

1Read the question and mark the key verb: trade, clear, settle, regulate, list or guarantee.
2Decide whether the question is about the exchange, the trading member, the clearing member or the clearing corporation.
3Match the activity: order placement belongs to trading members, settlement belongs to clearing members and the clearing corporation.
4For clearing member types, check three things: does it trade, does it clear its own and clients' trades, and does it also clear for other trading members?
5Eliminate options that give a trading entity a settlement-only function, or the reverse.
6Watch for absolute words such as 'only', 'never' and 'all'. Rules usually have conditions.
7If two options remain, pick the one that matches the NISM workbook wording.

Quickest way: Three-question test for member types

When to use it: Use it when an MCQ asks you to identify a member category and time is short.

Ask: does this member place orders on the exchange?
Ask: does it clear and settle its own and its clients' trades with the clearing corporation?
Ask: does it also clear for other trading members?
Trades but does not clear: trading member.
Clears only its own and its clients' trades, not for other trading members: self-clearing member.
Clears its own trades, its clients' trades and other trading members' trades: trading-cum-clearing member.
Clears only, does not trade, and clears for trading members and custodial clients: professional clearing member.

Common mistakes in Stock Exchanges and Trading Members

Treating every trading member as a clearing member.
The words sound alike and brokers often do both.
Fix: Remember that a trading member may depend on a clearing member to settle its trades.
Saying the stock exchange settles trades.
Students merge the trading platform with the settlement system.
Fix: The clearing corporation handles clearing and settlement. The exchange provides the trading platform.
Mixing up a trading-cum-clearing member and a self-clearing member.
Both clear their own and their clients' trades, so the names look alike.
Fix: Ask whether the member clears for other trading members. A trading-cum-clearing member does. A self-clearing member clears only its own and its clients' trades.
Confusing self-clearing with professional clearing members.
Both have 'clearing' in the name.
Fix: Self-clearing members clear only their own and their clients' trades. Professional clearing members only clear, for trading members and custodial clients, and do not trade.
Believing investors can trade directly on the exchange.
Mobile apps make trading look direct.
Fix: Orders reach the exchange only through a trading member.
Ignoring SEBI's role over exchanges.
Students focus on exchange rules and forget the regulator.
Fix: Exchanges are recognised and regulated by SEBI, and members follow both SEBI and exchange rules.

Worked examples

Example 1

A member places orders for clients on an exchange but does not itself settle trades with the clearing corporation. Which type of member is it?

A. Professional clearing member
B. Trading member
C. Self-clearing member
D. Custodian

Show the solution

The member places orders, so it trades.
It does not settle with the clearing corporation, so it does not clear.
A professional clearing member does not trade, so A is wrong.
A self-clearing member clears its own and its clients' trades, so C is wrong.
A custodian is a settlement-side participant and does not place orders for clients as a trading member, so D is wrong.

Answer: B. Trading member

Example 2

Which of the following best describes a professional clearing member?

A. It trades only for its own account
B. It clears and settles trades for others and does not trade
C. It runs the trading platform
D. It lists companies on the exchange

Show the solution

A professional clearing member exists to clear for others.
It does not place orders on the exchange.
Option A describes proprietary trading, so it is wrong.
Option C describes the exchange, so it is wrong.
Option D describes listing, so it is wrong.

Answer: B. It clears and settles trades for others and does not trade

Exam tips

Link each entity to one verb: exchange provides the platform, trading member trades, clearing member settles.
Learn the four member categories through three yes/no questions: trades, clears, and clears for other trading members.
Be careful with options using 'only' or 'always'.
Expect scenario questions that describe an activity and ask for the member type.
Learn the exact category names: trading member, trading-cum-clearing member, self-clearing member and professional clearing member.

Practice questions from Market Participants in the Securities Market

Stock Exchanges and Trading Members in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Stock Exchanges and Trading Members: frequently asked questions

What is the role of a stock exchange in the securities market?

A stock exchange provides a regulated platform where securities are traded under fixed rules. It supports price discovery and liquidity. It is recognised and regulated by SEBI.

What is the difference between a trading member and a clearing member?

A trading member places orders on the exchange. A clearing member settles trades with the clearing corporation. One entity can be both, but it need not be.

What are the types of clearing members?

The types are trading-cum-clearing members, self-clearing members and professional clearing members. A trading-cum-clearing member clears its own, its clients' and other trading members' trades. A self-clearing member clears only its own and its clients' trades. A professional clearing member clears for others and does not trade.

Can an investor trade directly on a stock exchange?

No. Investors place orders through a trading member, who is admitted by the exchange and registered with SEBI.