The world of stock trade is a vibrant one. It attracts traders who are looking for higher returns. Intraday investors are the opposite of buy-and hold investors who can stay invested for a long time. To profit from price movements, intraday traders might buy and sell stocks multiple time in a trading session. Understanding market functions is essential for anyone who wants to trade well. Trade settlement is one such aspect that can have a direct impact on your trading strategy. This article will discuss the Indian stock exchange rolling settlement process.
Rolling settlement is a common method for settling trades on the exchange. This refers to a system in which securities that were traded on the current date are settled using successive dates. Contrary to account settlement where the securities that were traded were settled on a specific date, rolling settle adopts continuous settlement. Securities that were traded yesterday are processed one day prior to the securities that were traded today.
Rolling settlement is the current method of trade settlement in Indian bourses. NSE used to follow a weekly settlement process. All securities were processed on a Thursday.
T+3 settlement policies replaced the weekly settlement system. T is the date that the trade took place. However, the current system is T+2 days. Securities exchanged on Wednesday get settled on Friday and those transacted on Thursday are processed on Monday. (Saturdays and Sundays are the week holidays).
Let's look at an example to help us understand.
Let's say that trader A bought 100 shares on January 1. According to the T+2 settlement system the settlement date falls on January 3. Trader A will need to pay the total amount and the shares will be credited to his account. The seller who completed the transaction will also deliver the stocks to the first trader by January 3. The seller who made the transaction will deliver the stocks to the first trader on January 3.
Important to remember is that settlements do not occur on interfering holidays such as bank holidays, exchange holidays and Saturdays or Sundays which are weekly holidays in bourses.
Inteday traders and institutional investors are not affected by the rolling settlement. They are exempt from squaring off. Retail investors who trade positions that span more than one night are affected by the rolling settlement. The pay-in and payout are processed within T+2 days.
The rolling settlement system requires that any position left unfilled at the close of a trading session is settled on T+n days. Current regulations follow the T+2 settlement cycle.
Two fundamental concepts in the rolling settlement are pay-in and payout.
Pay-in occurs when securities are sold and transferred to the stock exchange. The bourse receives the money that buyers have paid.
Pay-out day is the day that the buyer receives securities from his account. In the same manner, the seller also receives payment. The current rolling settlement in stock market is pay-in and payout on the second day after the transaction date.
Rolling settlement is less risky than the older method of account settlement system, where all trades were settled at a fixed date.
Evidently, account settlement methods were complicated because of the large volume of trades that were settled in a single day. This increased the pay-in/pay-out ratio and added complexity to an already complex system.
Rolling settlement allows trades to be settled on their own, and not with transactions that occur the next day. This reduces settlement risk.
The current system also makes it easier to deliver securities to buyers and remit them to sellers, increasing the overall efficiency of the stock exchange.
Today, money transfers are instantaneous. The settlement period is still in place as a rule for investors, traders and brokers.