The Indian stock market ecosystem is dynamic and robust, having the finest regulatory structure and trading technologies in the world with significant participation from overseas investors.

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But there were several crests and troughs along the way, making the ride far from smooth. From the ‘badla’ scam to the Harshad Mehta scam to the most recent colocation scam, the several scams that have shook markets have threatened to shatter the credibility of the stock investment environment. However, market players and the regulator have learned from previous mistakes to tighten the rules and trading mechanisms in order to establish a stable market ecosystem.

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The Companies Act of 1850 laid the groundwork for a structured market for stock trading in India. The American Civil War, and the consequent cotton shortage, also had a role. During the war, Lancashire mills were forced to import raw materials from other nations, and they switched to cotton from Surat, whose price surged between 1861 and 1865. As a result, many cotton traders’ fortunes skyrocketed.

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The Native Share and Stockbroker’s Association, which later evolved into the Bombay Stock Exchange, the oldest stock exchange in India and Asia, was founded in 1875 by a group of brokers who had been doing informal trading around Mumbai under banyan trees and other locations.

Numerous other regional stock exchanges were established in Ahmedabad, Calcutta, Madras, Indore, Punjab, Uttar Pradesh, Nagpur, Hyderabad, and Delhi between 1890 and 1947.

In the 1980s, Cochin, Kanpur, Pune, Ludhiana, Guwahati, Mangalore, Patna, Jaipur, Bhubaneswar, Rajkot, Vadodara, and Coimbatore were recognised as regional exchanges.

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The largest exchange at the time, serving the nation’s most wealthy region, was the Bombay Stock Exchange. However, exchanges in other cities including Calcutta, Madras, Coimbatore, and Cochin also fared well.

Large rooms served as the business hubs for Indian stock exchanges, where brokers’ representatives would gather for a few hours to purchase and sell equities on their client’s behalf. Settlements were recorded on pieces of paper and shown on the exchange blackboard.

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Client orders would be carried from the broker’s office to the exchange ring by runners. This technique evolved into ring-based trading with an open outcry system, which lasted until the 1990s when online trading began.

The National Stock Exchange‘s electronic screen-based trading platform for the wholesale debt and equity markets was introduced in 1993–1994; this event signalled the beginning of the demise of regional stock exchanges. The NSE was granted permission to open trading terminals throughout India, eroding the market dominance of all regional exchanges. In addition to aggressively acquiring sub-brokers who worked as full-time traders throughout India, NSE drastically reduced the cost of membership.

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Although the BSE launched online trading in May 1995, the government did not let it spread nationwide until 1997. This two-year delay changed the course of BSE’s destiny, as the NSE surged ahead during this time to become the country’s largest stock exchange. When the ‘badla’ forward trading system was phased out in 2000-2001, the NSE strengthened its position since brokers on its trading platform were more familiar with stock futures and options, which replaced badla. As a result, almost all derivative volumes moved to the NSE.

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Due to the BSE and NSE’s pan-Indian operations during the 1990s, regional equity exchanges became outdated and experienced an investor exodus to bigger exchanges. In 2012, SEBI finally implemented an exit strategy for RSEs, thereby ending their reign.

For more than two decades, NSE has dominated the Indian stock market, accounting for 100% of equity derivative transactions and approximately 80% of cash trading volumes. 

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The team of experts responsible for administering NSE has done an outstanding job of enhancing user experience, transparency, and protecting smaller investors. Though the recent colocation fraud casts suspicion on the exchange’s administration, it cannot erase the fact that the NSE has played a crucial role in the expansion of the Indian stock market since 1993.