Chapter 3 of 7
How stock exchanges work
Follow an order from the broker to matching, clearing and demat holdings; understand why displayed prices do not guarantee execution.
In this chapter
Separate the institutions #
An exchange supplies a trading venue and rules. A broker accepts a client’s instructions and routes orders subject to checks. A clearing corporation manages settlement obligations and risk controls. A depository and its participants maintain electronic securities records. Each role answers a different operational question.
The broker application is only the visible interface. A rejected order can result from insufficient funds, a price restriction, an invalid quantity, a risk control or a temporary service problem. An accepted order is still not necessarily a completed trade.
Orders meet in an order book #
Buy orders state prices and quantities buyers will accept; sell orders do the equivalent for sellers. The best bid is the highest currently available buying price, while the best ask is the lowest selling price. The difference is the spread. A last traded price describes a previous transaction, not the price available for your full quantity.
A market order seeks available liquidity, subject to venue and broker controls. A limit order restricts the execution price but can remain unfilled. Orders can fill partially at different prices; execution reports matter more than the original screen indication.
Trading is not the end of the process #
After execution, obligations must settle under the relevant segment’s rules and calendar. Cash equities, index derivatives, stock derivatives and commodity contracts need not follow the same settlement method. Holidays and special arrangements can affect dates. Do not carry a remembered timeline from one product into another.
Reconcile the contract note, funds ledger and holdings statement. Use official grievance channels if records do not agree. No one assisting with reconciliation needs an OTP or the password to your trading account.
Decision lab: Last price versus executable price #
A market screen shows the last trade at 100, but only 20 units are offered at 100.10 and the next 80 at 100.50. Buying 100 units would average 100.42 before costs if those offers remain available; a prior print at 100 is not a promised execution.
Calculate slippage against the original reference and compare an unfilled limit order with the market-order outcome. Include partial fills and a changing order book. A desired price, a quoted price and a realised fill belong in different ledger fields.
Hypothetical worked example
The average execution price differs from the first quote
A fictional sell book offers 20 units at ₹100 and another 30 at ₹101. A market buy for 40 units could consume 20 at each price. The weighted average is (20 × 100 + 20 × 101) ÷ 40 = ₹100.50 before charges.
A buy limit at ₹100 would not intentionally pay ₹101, but it may fill only 20 units or not fill at all if the book changes first. The limit changes price control, not the certainty of receiving 40 units.
Thin liquidity can make a large order very different from a one-unit example. This is why quantity, spread and depth belong in any execution discussion.
Common mistakes
- Assuming that the last traded price is executable for any quantity.
- Treating an order confirmation as a settlement confirmation.
What does a limit order control?
Make this chapter useful
Can you defend the reasoning?
Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.
Sources and further reading
- SEBI investor education ↗
- NISM: Research Analyst learning topics (scope reference; independent lessons) ↗
- SEBI Investor: understanding bonds ↗
Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.
Progress is stored only on this browser.
Back to Market foundations · Learning library · Calculators
General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.