This is Part 2 of our new series on the History of the Indian Stock Market, which attempts to map its birth and evolution. To read the first part ‘Under The Banyan Tree’, click here.
The trading pits are now silent, but don’t let that fool you into believing that there is no activity. In fact, activity has only become more frenzied, having shifted from the trading pits to the trading screens.
Change can be quite disarming. Sometimes, it is slow and just creeps up on you, and at other times, it is sudden, obvious, and hugely catalytic. Towards the late 1900s, the stock markets slowly evolved in terms of the number of participants, the stocks traded, and also the sway they held on the overall growth in wealth. However, something that stayed more or less the same through the century was the way stocks were traded… Until that changed at the turn of the millennium.
My first job in the stock market was on one of the busiest trading desks at that time. Rows and rows of screens that mirrored the emotions of those who sat in front of them. Initially, it was difficult to make sense of all the numbers constantly changing, on a perennial cycle of red and blue. Looking at the trading screen, I was both petrified as well as mesmerised. I was told that there were two things that I needed to remember - the plus sign on the keyboard was for buying a security and the minus sign was for selling a security. It was really as simple as that.
Anchored to human behaviour
Stock market trading is as much about the people as it is about the companies listed on it and is fundamentally anchored to human behaviour. Slowly, I learnt to punch in orders and buy and sell securities with speed and efficiency. Not only did I learn to read the markets, I also learnt to read the people around me. You really didn’t need to look at the screen to know what was happening in the market.
Harried expressions always meant that the screen was bathed in red, and jubilant expressions and smiles always indicated that blue was the colour of the day. Oh yes, the stock market is a unique animal. Contrary to the popular norm that uses red for loss and green for profit, in the stock market, upward moves are painted in blue. If you know this and have ever wondered why that might be the case then I would say, join the club. Although, I do have two theories to explain this. One, it could be that at the time electronic trading started maybe design related technology did not allow for the use of green or maybe blue was chosen since it is considered to be a more soothing colour. Odds are, it was probably an arbitrary decision. Moving on, you would also see a few traders who smiled in the midst of doom or hung their heads while the rest rejoiced. Clearly, they had taken a contrarian position.
Open outcry becomes the norm in trading
It makes sense if you look at how the act of trading has evolved over the years. The roots of trading lie in the open outcry system. At one time, not so far back, this system was used by traders at all stock exchanges across the world. Introduced at the Amsterdam Stock Exchange, founded in the 17th century, it eventually became a global norm in trading.
The open outcry system basically involved traders and brokers gathering together at the ‘trading pit’ or the ‘trading floor’ which was both figuratively and literally the centre of all trading activity. Traders communicated verbally and via hand signals to convey trading information along with their intention to either buy or sell a security. No plus and minus signs for these traders. However, signs or hand signals were definitely present. Traders at the Bombay Stock Exchange (BSE) used a variety of hand signals to convey both their emotions as well as their trade intentions.
Exhibit 1: Hand signals used by traders at the BSE
Inevitably, a frenzied group of people, communicating primarily through sign language might not inspire much confidence. Worse still, it might appear to be chaotic and disorganized. But, as they say, appearances can be deceptive. The open outcry system was, in fact, fairly organized and systematic. Further, the setting was very personal as the traders functioned in close proximity. This enabled them to read each other’s body language and incorporate it into their trading decisions.
Exhibit 2: Badges to enter the trading ring
Evolution towards an electronic trading system
This was, of course, before the introduction of electronic trading systems. Today, there are but a handful of stock exchanges where trading takes place physically on the floor through the open outcry system.
In the 1980s, many global stock exchanges gradually eschewed the open outcry system in favour of telephone trading and eventually moved to trading through computerised networks that powered the electronic trading systems. In 1986, the London Stock Exchange (LSE) was among the first in the world to move to an automated system. Leading Indian bourses were quick to follow suit and transition to electronic trading systems. In 1993-94, the National Stock Exchange (NSE) commenced electronic or screen-based trading, while in 1995, the Bombay Stock Exchange (BSE) introduced the BSE on-line trading (BOLT) system.
With this, India entered the era of electronic trading, one which most of us are familiar with today. One of the biggest benefits of this system is that it gives retail investors an opportunity to trade on their own, thereby widening the net and extending the opportunity to create wealth to swathes of people across the country.
The stock market can be an intimidating place, especially if you have to jostle for a place in a sea of traders. Is it easier to immerse yourself in a sea of numbers dancing around on the trading screen? While that is certainly debatable, what is not debatable is the fact that the evolution to an electronic trading system has definitely made the Indian stock market more accessible, efficient, and resilient.
But this access to an easy system also has resulted in the downfall of many who feel the stock market is easy money. So as you enjoy learning about the stock markets, also remember that the evolution of good trading and investing has moved to the ideas of rationality and unemotional thinking - almost a figurative transition from the trading pits to the trading screens, just as this post began.
Remember the ancient adage (from the first century BC, in the allusion of the Sword of Damocles) "With great power comes great responsibility"? Most of us have heard about this line from the great Spiderman, but let me modify this a bit for the millennials and close with “With easy access, comes great responsibility.”
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