Excerpts from the book Bulls, Bears and Other Beasts: How BSE used to work in the eighties

In the fascinating book 'Bulls Bears and Other Beasts', author Santosh Nair describes the workings of the Bombay Stock Exchange (BSE) in the 80s and early 90s. The story is told from the perspective of his protagonist Lalchand Gupta

This excerpt explains how BSE used to work.

...A broker could have seven of his dealers in the trading ring, apart from himself. Orders placed by clients over the telephone to the broker's office would be conveyed to the dealers on the trading floor, who would  then execute the trades. Before the days of the hotline, brokerage firms had runners who would rush to the trading floor to relay orders.

....For one month I was assigned to a senior, and had to observe him as he negotiated deals with brokers and jobbers. 

A jobber is a professional speculator, and buys and sells shares for himself. He does not have any clients. His business is to speculate on which way the prices are moving and make a quick profit on it. He does not want to buy shares and keep  them for long term as investors do. But, to do business on the floor of the exchange, he needs to have a broker as a sponsor. He shares a part of his profit with the broker under a pre-decided agreement.

In a way jobber acts as an agent of the broker. If the jobber defaults on a deal, the broker is held responsible by exchange. Hence brokers chose jobbers with care. Jobbers were an important source of liquidity and brokers would always deal through them. 

A jobber helped create liquidity in a stock by offering two-way quotes and also helped in price discovery. He took on the risk, confident that he would be able to sell whatever he bought and buy back whatever he sold. 

In those days there were 'counters' for individual stocks. Jobbers and brokers dealing in Reliance shares would gather at a certain sport, those dealing in TISCO in another spot and so on. 'A' group shares, where a buyer or seller could carry forward trades the next settlement by paying an interest charge known as badla, were called vaida. 'B' group shares, which were not eligible for carry forward were known as rokda (Cash), since they had to be settled at the end of the fortnightly settlement cycle.

There was a public address system on every floor of the stock exchange building, on which would be broadcast the prices of most A group stocks, and some times B group stock if there were big moves on them. For a price, brokers could get an extension of that system so that they could hear the broadcast sitting in their offices. Brokerages wanting to cut costs would usually station one of their employees in the corridor of the exchange so that they could alert their offices about important announcements.

The trading ring was on the first floor. Outside both the first and second floors were huge blackboards on which an employee of the stock exchange would write down the prices of the most actively trades stocks, updating them every thirty minutes.

The trades done on the floor of the exchange had to be entered in the sauda pad. Every sheet of sauda pad had five columns for five details about the deals - the clearing number of the broker one has dealt with, whether shares were bought or sold, the name of the stock, quantity of the shares and the price at which the deal was done. Disputes would arise if one broker erred in recording the quantity of shares or the nature of the transaction in his sauda pad. The stock exchange would then issue an objection memo, known as vaanda kaapli, to the two members and ask them to sort out their disagreement. 

The colour of the sauda pad itself contained information about the traders. Broker-owners had pink pads while their employees and jobbers had blue ones. If the two parties failed to arrive at an agreement, the pink sauda pad would prevail since the broker was accorded a higher weightage in the caste system of the stock exchange. 

Around half past five in the evening, the stock exchange would publish the 'bhav copy', a report listing the high, low and closing prices of the stocks traded that day. It was not done scientifically, but was broadly reliable. Its compilation was done by a stock exchange official collecting the prices by talking to the brokers and jobbers and by checking their sauda pads.

The stock exchange issued only a limited number of bhav copies, so there was a scramble to get them. Some ingenious players found a way to profit from this by taking photocopies of the bhav copy and selling them outside the exchange for a few rupees.

After trading hours there operated an unofficial market for some of the more liquid stocks. this was called the kerb market and, true to its name, the dealings were conducted on the street outside the stock exchange. The prices in the kerb market would be at a premium or discount base don the closing prices on the stock exchange, depending on the sentiments and events. 

Today, it all looks fascinating, the level of primitiveness that existed in the stock markets just about 30 years ago. It is not for nothing that people did not trust stock market and called it gambling. With the lack of transparency and the level of manipulation, it was akin to gambling, retail investors stood no chance.