Secondary market: trading infrastructure, indices and valuation

Detail

1. What the secondary market is

• Secondary market = the market where investors buy and sell securities that already exist, among themselves.
• In the primary market, a company sells new shares (for example, in an IPO) and gets the money.

• In the secondary market, the money goes from one investor to another. The company gets nothing directly.

• It does two jobs:

• Liquidity: an investor can sell shares and get cash quickly.

• Price discovery: buyers and sellers together set a fair price for the share every moment.

• Why this matters for the economy: people buy new shares in the primary market more readily when they know they can sell them later in the secondary market.

2. What moves share prices (Class 7, Banks and the Magic of Finance)

• Company performance:
• A good outlook raises the share price.

• A bad product, a workers' strike or a big loss lowers it.

• Government policy: new laws and tax rules change expected profits, so prices move.

• Political instability, wars and economic shocks: disasters, pandemics and sudden policy changes make investors fearful. They sell, and prices fall.
• Stock market boom = the share prices of many companies rise together.
• Stock market crash = the share prices of many companies fall steeply at the same time, usually because of panic selling.

3. Plumbing: depositories and demat accounts

• Depository = an institution that holds securities electronically. It transfers ownership by book entry (a change in its computer records), so no paper moves.
• NSDL (National Securities Depository Ltd, 1996) and CDSL (Central Depository Services Ltd, 1999).

• Both work under the Depositories Act, 1996.

• Depository participant (DP) = the depository's agent that deals with investors. DPs are usually brokers or banks.

• Demat account = an account that holds shares in electronic form instead of paper certificates. It works much like a bank account for shares.

• Problems it removed: forged, lost or stolen certificates, and slow transfer of ownership.

• Demat growth:

• 7.38 crore demat accounts in October 2021, more than double the number three years earlier [8].
• The number grew from 11.45 crore in FY23 to 15.14 crore in FY24 [9].
• About 235 lakh accounts were added in FY26 (till December 2025), taking the total above 21.6 crore [10].
• (NCERT scaffold: "grown sharply since 2020 (verify current)".)

4. Clearing corporation and novation

• Clearing corporation = the body that clears trades (works out who owes what) and settles them (actually moves the shares and the money).

• Examples: NSE Clearing Ltd (for NSE) and ICCL, the Indian Clearing Corporation Ltd (for BSE).

• Novation = the clearing corporation steps into the middle of every trade.

• It becomes the buyer to every seller and the seller to every buyer.
• So if one side fails to pay or deliver, the other side still gets paid.

• This removes counterparty risk (the risk that the other party in a deal does not honour it).

• Settlement Guarantee Fund (SGF) = a pool of money that backs the clearing corporation. It covers any shortfall when a member defaults.

5. Settlement cycle: from badla to T+0

• Settlement cycle = the time between a trade and the final exchange of shares and money. "T" is the trade day.

Period	Cycle
Before 2001	Weekly account settlement, with badla (carry-forward of trades to the next week)
2001	T+5 rolling settlement
2003	T+2
Sept 2021	SEBI allows T+1 on an optional basis [5]
2022 to 27 Jan 2023	T+1 phased in, stock by stock; complete on 27 January 2023
21 March 2024	Optional T+0 (beta) notified [2]
December 2024	Scope of optional T+0 widened [3][4]

• Badla = the investor could push payment or delivery forward to the next week. It encouraged heavy speculation, and it was part of the setting of the 1990s scams.
• Rolling settlement = each day's trades are settled separately, a fixed number of days later. This replaced settling a whole week's trades together.
• T+1 settlement = shares and money change hands one business day after the trade.
• India was among the first major markets to move fully to T+1.

• Benefits: less time in which a default can happen, so less risk. Investors also get their money back faster.

• T+0 (beta) = same-day settlement.

• SEBI circular dated 21 March 2024 [2].
• It started with a limited set of 25 scrips and a limited number of brokers [2].
• NSE and BSE made it available to non-custodian clients from 28 March 2024 [2].

• T+0 is optional. It runs alongside T+1 and does not replace it [2].

• Wider T+0 (circular of 10 December 2024) [3]:

• It covers up to the top 500 scrips by market capitalisation.
• Stocks were added in steps of 100 a month, starting from the bottom 100 of that list [4].
• SEBI has since given Qualified Stock Brokers (large brokers) more time to put T+0 systems in place (October 2025) [11].

6. Algorithmic trading

• Algorithmic trading = computer programs place orders automatically, based on pre-set rules (price, time, volume).

• High-frequency trading (HFT) = a very fast form of algorithmic trading. Programs send huge numbers of orders within fractions of a second.

• SEBI's rules:

• SEBI first issued broad guidelines for algorithmic trading in May 2013 [12].
• Retail framework: SEBI circular "Safer participation of retail investors in Algorithmic trading", dated 4 February 2025 [13]. It was first due to take effect on 1 August 2025 [13].

• SEBI then extended the implementation timeline twice: in April 2025 [14] and again in September 2025 [15].

• NSE co-location case:

• Co-location = brokers place their servers inside the exchange's own building to get very fast access.
• Some brokers got unfair early access to price data through NSE's system. This showed that speed can become an unfair advantage.
• Lesson: technology in markets needs equal access, audits and strict rules.

7. Circuit breakers

• Circuit breaker = an automatic halt in trading when prices move beyond set limits. It gives investors time to think and stops panic from spreading.
• Market-wide (index-based) circuit breaker [6][7]:
• It is triggered by a move of 10%, 15% or 20%, up or down, in the Sensex or the Nifty 50, whichever crosses the limit first.

Move	When it happens	Halt
10%	Before 1 PM	1 hour
10%	1 PM to 2:30 PM	30 minutes
10%	At or after 2:30 PM	No halt
15%	Before 1 PM	2 hours
15%	1 PM to 2 PM	1 hour
15%	At or after 2 PM	Rest of the day
20%	Any time	Rest of the day

• How the percentages become points: the limits are fixed in index points every quarter, based on the previous quarter's closing level [6].
• Sensex limits are rounded to the nearest 25 points [6].
• Nifty limits are rounded to the nearest 10 points [6].

• Worked example: suppose the Nifty closed the last quarter at 25,000. The 10% trigger is then 2,500 points. The 15% trigger is 3,750 points. The 20% trigger is 5,000 points.

• March 2020: the market-wide circuit breaker was triggered during the COVID crash.

• Stock-level price bands: individual stocks have daily limits of 2%, 5%, 10% or 20%. A stock cannot trade outside its band that day.

8. Indices: Sensex and Nifty 50

• Stock market index = one number that tracks the prices of a chosen group of shares. It works like a thermometer for the market.
• Sensex (BSE):
• BSE, set up in 1875, is Asia's oldest stock exchange.
• Base year 1978-79 = 100.
• 30 large, actively traded companies.
• Weighted by free-float market capitalisation since 2003.
• Class 11 (Index Numbers): a rising Sensex means investors expect better earnings and have growing confidence in the economy's health. It is "a useful guide for investors".
• NCERT outdated: Class 11 calls it the "Bombay Stock Exchange Sensitive Index", with 30 stocks from 13 sectors. Its example has the Sensex "crossing 8000".

• Now: the exchange is BSE Ltd. The sector mix changes at every rebalancing. Index levels are many times higher (record highs in 2024).

• Nifty 50 (NSE):

• 50 large, liquid companies. Liquid means easy to buy and sell without moving the price much.
• Base 3 November 1995 = 1000.

• Also weighted by free-float market capitalisation.

• How a free-float index is calculated:

• Index = (current free-float market cap of the index stocks ÷ base-period free-float market cap) × base value
• Worked example: suppose the base-period market cap was ₹1,000 crore and the base value is 100. If today's free-float market cap is ₹8,00,000 crore, the index is (8,00,000 ÷ 1,000) × 100 = 80,000.

9. Valuation measures

• Market capitalisation (market cap) = share price × number of shares outstanding.
• Example: price ₹500 × 10 crore shares = market cap of ₹5,000 crore.

• SEBI's size bands (by rank in market cap):

  • Large-cap = the top 100 companies.
  • Mid-cap = companies ranked 101 to 250.
  • Small-cap = companies ranked 251 onwards.

• Free float = the shares actually available for trading. It excludes shares held by promoters and shares that are locked in.

• Example: in the company above, promoters hold 60%. The free float is 40%. So the free-float market cap = 0.40 × ₹5,000 crore = ₹2,000 crore.

• Why indices use free float: a company with a big promoter holding cannot swing the index more than its tradable shares justify.

• Market capitalisation-to-GDP ratio = total market cap ÷ GDP × 100. It is also called the "Buffett indicator". A very high ratio can mean the market is over-valued; a very low one can mean it is under-valued.

• Example: a market cap of ₹450 lakh crore ÷ a GDP of ₹330 lakh crore ≈ 136%.

• India's figures:

  • BSE market cap-to-GDP was 136% at the end of December 2024. This was far higher than China (65%) and Brazil (37%) [9].
  • India ranked fifth in the world on this ratio [9].
  • India's capital markets grew from 144% of GDP (CY2017) to 175% (CY2024) [10].

• Price-to-earnings (P/E) ratio = share price ÷ earnings per share (EPS). It shows how many rupees investors pay for each rupee of yearly profit.

• Example: price ₹500 and EPS ₹25 → P/E = 20. Investors pay ₹20 for every ₹1 of profit.

• How to read it:

  • A high P/E means investors expect fast growth, or the share may be over-priced.
  • A low P/E means low expectations, or the share may be under-priced.

• India VIX (volatility index) = a measure of expected near-term volatility, worked out from Nifty option prices.

• It is called the "fear gauge" because it rises when investors are anxious. It usually moves opposite to the Nifty.

• Bull and bear markets:

• Bull market = a long rise in prices, with optimism.
• Bear market = a long fall in prices, commonly 20% or more from a peak.

10. Key episodes and the reforms they triggered

• Harshad Mehta scam (1992):
• Bank money was moved into shares through misuse of ready-forward deals and bank receipts. This pushed prices up artificially.

• Result: the SEBI Act, 1992 gave SEBI statutory powers (powers given by law). NSE and screen-based trading followed.

• Ketan Parekh scam (2001):

• Prices of chosen stocks were rigged using bank and cooperative-bank funds.

• Result: badla ended and rolling settlement started (2001).

• Global financial crisis (2008): foreign investors pulled money out and Indian indices fell sharply.

• COVID crash (March 2020): the market-wide circuit breaker was triggered.
• Record highs (2024): helped by strong participation from retail and domestic investors.

Prelims Hooks

• NSDL (1996) and CDSL (1999) are depositories under the Depositories Act, 1996. DPs are their agents, not the depositories themselves.
• Novation: the clearing corporation becomes the buyer to every seller and the seller to every buyer. This removes counterparty risk. It is backed by the Settlement Guarantee Fund.
• T+1 was completed on 27 January 2023. Optional T+0 (beta) was notified on 21 March 2024 for 25 scrips [2].
• Market-wide circuit breaker: 10%, 15% or 20%, on the Sensex or the Nifty 50, whichever is breached first. A 20% move halts trading for the rest of the day [6][7].
• Sensex: base 1978-79 = 100; 30 stocks. Nifty 50: base 3 Nov 1995 = 1000; 50 stocks. Both are weighted by free-float market cap.
• SEBI size bands: large-cap = top 100; mid-cap = 101-250; small-cap = 251 onwards.
• Buffett indicator = market cap ÷ GDP. India's BSE ratio was 136% (December 2024) [9].
• India VIX is calculated from Nifty option prices, not from the prices of the underlying shares. It is the "fear gauge".
• Trap: a bear market is commonly a fall of 20% or more from a peak. A 10% fall is usually called a "correction".
• Trap: secondary-market trades do not raise fresh capital for the company.

Mains Points

• Faster settlement versus market readiness: T+1 and T+0 reduce the time for defaults and free investors' money faster.
• But custodians and foreign investors working in other time zones have less time to arrange funds.

• That is why T+0 is optional and phased in.

• Financialisation of household savings:

• Demat accounts rose from 7.38 crore (October 2021) to more than 21.6 crore (FY26) [8][10].
• This deepens capital markets and supports investment.

• But it exposes first-time investors to losses. It raises the need for financial literacy and SEBI's investor-protection work.

• Technology and fairness:

• Algorithmic trading and HFT make markets more liquid.
• But the NSE co-location case shows that speed can become an unfair edge.

• SEBI's 2025 retail algo framework tries to make retail algo trading safer and traceable [13].

• Reading valuation signals:

• A high market cap-to-GDP ratio (136%, December 2024) [9] and high P/E ratios can signal over-valuation.
• Circuit breakers, price bands and the VIX act as safety valves. The lesson from the 1992 and 2001 scams is that regulation must move ahead of innovation.