InvestorQ : How does the trading in government securities take place in the market?
NISHA Nayak made post

How does the trading in government securities take place in the market?

vidhya Laxmi answered.
3 years ago

Trading in Government securities

There is an active secondary market in government securities. The securities can be bought / sold in the secondary market (i) over the counter (OTC), (ii) through the Negotiated Dealing System (NDS),

or (iii) through the Negotiated Dealing System-Order Matching (NDS-OM).

Over the Counter/Telephone Market

In this market, a participant who wants to buy or sell a government security may contact a bank / primary dealer/financial institution either directly or through a broker registered with SEBI or negotiates for a certain amount of a particular security at a certain price. Such negotiations are usually done over the telephone, and a deal may be struck if both the parties agree on the amount and rate. In the case of a buyer, such as an urban co-operative bank wishing to buy a security, the bank’s dealer (who is authorized by the bank to undertake transactions in government securities) may get in touch with other market participants over the telephone and obtain quotes.

All trades undertaken in the OTC market are reported on the secondary market module of the Negotiated Dealing System (NDS).

Negotiated Dealing System

The Negotiated Dealing System (NDS) for electronic dealing and reporting of transactions in government securities was introduced in February 2002. It allows the members to electronically submit bids or applications for the primary issuance of government securities when auctions are conducted. The NDS also provides an interface to the Securities Settlement System (SSS) of the PDO of the RBI, Mumbai, thereby facilitating the settlement of transactions in government securities (both outright and repos) conducted in the secondary market. Membership to the NDS is restricted to members holding SGL and/or current accounts with the RBI, Mumbai.

Negotiated Dealing System-Order Matching

In August 2005, the RBI introduced an anonymous screen-based order matching module on the NDS, called the Negotiated Dealing System-Order Matching (NDS-OM). This is an order-driven electronic system where the participants can trade anonymously by placing their orders on the system or accepting the orders already placed by other participants. The NDS-OM is operated by the Clearing Corporation of India Ltd. (CCIL) on behalf of the RBI. Direct access to the NDS-OM system is currently available only to select financial institutions such as commercial banks, primary dealers, insurance companies, and mutual funds. Other participants can access this system through their custodians, i.e., those with whom they maintain Gilt Accounts. The custodians place the orders on behalf of their customers, like the urban co-operative banks. The advantages of the NDSOM are price transparency and better price discovery.

Gilt Account holders have been given indirect access to the NDS through custodian institutions. A member (who has direct access) can report on the NDS the transaction of a Gilt Account holder in government securities. Similarly, Gilt Account holders have also been given indirect access to the NDS-OM through the custodians. However, two Gilt Account holders of the same custodian are currently not permitted to undertake repo transactions between themselves.

Stock Exchanges

Facilities are also available for trading in government securities on the stock exchanges (NSE, BSE), which cater to the needs of retail investors. The NSE’s Wholesale Debt Market (WDM) segment offers a fully automated screen-based trading platform through the National Exchange for Automated Trading (NEAT) system. The WDM segment, as the name suggests, permits only high value transactions in debt securities. The trades on the WDM segment can be executed in the continuous or negotiated market. In the continuous market, orders entered by the trading members are matched by the trading system. For each order entering the trading system, the system scans for a probable match in the order books.

On finding a match, a trade takes place. In case the order does not find a suitable counter order in the order books, it is added to the order books and is called a passive order. This could later match with any future order entering the order book and result into a trade. This future order, which results in the matching of an existing order, is called the active order. In the negotiated market, deals are negotiated outside the exchange between the two counterparties, and are reported on the trading system for approval.