Part I · Foundations · M01 · week 1 · 12 h
Market structure, microstructure and costs
How Indian markets are built: exchanges, clearing, depositories and SEBI; the trading day and the call auctions; the limit order book; circuit breakers; T+1 settlement; the full algebra of costs and taxes; index construction and corporate-action adjustments.
Prerequisites none in the course. Mathematics: monotone step functions, linear algebra at the level of weighted sums, basic optimisation. Time: ~12 hours (8 reading, 4 on problems and code). Primary texts: Larry Harris, Trading and Exchanges: Market Microstructure for Practitioners (OUP, 2003), Parts I–II; the NSE and SEBI circulars cited in each section. M00 covers the basics (accounts, orders, the trading day) if you need them first.
Every later module assumes this one. A price series you download is the output of an auction, a matching engine, a settlement system, an index committee and a corporate-actions desk. Each of these leaves fingerprints in the data. A strategy you test pays brokerage, a transaction tax, exchange fees, stamp duty, GST and the spread. Those costs decide whether most short-horizon ideas can work at all. This module sets out the machinery precisely and does the algebra.
Learning outcomes
- Name the role of each Indian market institution (SEBI, NSE, BSE, NSE Clearing, ICCL, NSDL, CDSL, the broker) and trace one trade from order entry to shares in your demat account.
- Compute the equilibrium price of a call auction by hand, and prove that maximising executable volume selects the price where cumulative demand crosses cumulative supply (Proposition 1.1).
- Simulate a continuous limit order book with price-time priority, and compute the volume-weighted fill price and slippage of a market order against it.
- Compute the full statutory cost of an Indian equity, futures or options round trip at current rates, and derive the break-even price move as a function of the charges (Proposition 1.2).
- Classify the tax treatment of delivery, intraday and F&O income for an Indian resident individual, and compute the tax on a given set of trades.
- Derive the free-float index level and show why the divisor must change on some corporate actions but not on others (Propositions 1.3–1.4).
- Derive theoretical ex-prices for splits, bonuses, rights issues and dividends, build an adjusted price series, and state exactly which return the adjusted series measures (Proposition 1.5).
- Read SEBI's retail-loss studies and its 2024–2026 derivatives rules as evidence about who wins in Indian markets and why.
Sections ≈ 2 h 50 min of study
- Foundation 9 sections · ≈ 1 h 40 min
- Core 4 sections · ≈ 45 min
- Advanced 2 sections · ≈ 25 min
- Learning outcomes Foundation 5′
- 1.1 The institutions Foundation 10′
- 1.2 The trading day Foundation 10′
- 1.3 Call auctions and the equilibrium price Advanced 15′
- Figure Call auction: where demand crosses supply
- 1.4 The continuous limit order book Foundation 15′
- Figure A market order walks the book
- 1.5 Price bands, circuit filters and market-wide circuit breakers Foundation 10′
- 1.6 Clearing and settlement Foundation 10′
- 1.7 Transaction costs: the algebra Core 20′
- Figure Break-even move of a round trip
- 1.8 Taxes on trading and investing income Foundation 10′
- 1.9 Indices: free-float weighting and the divisor Advanced 10′
- 1.10 Corporate actions and adjusted prices Core 15′
- 1.11 Case studies Foundation 20′
- Summary of key results Foundation 10′
- Readings and resources Core 5′
- Facts that change Core 5′