uTrade Algos
The process of stock trading in India is nothing like what it once was several years ago—it’s a lot simpler and smoother today. The process of investing and trading has leapt miles ahead thanks to advancements in technology and the widespread adoption of online technologies. Today’s investors can transact securities with a few taps on their smartphones. However, many only focus on the buying and selling elements of the transaction process, completely ignoring the element of ‘settlement’.
Settlements in the stock market refer to the process of actually transferring the shares and funds between the buyer and seller to complete the trade. In this blog, we will take a closer look at the concept of rolling settlements in intraday trading, which is the accepted standard of settling trades today.
Table of Contents
Meaning of Rolling Settlement
A stock market trade is settled when the buyer receives their shares and the seller receives the money. One doesn’t get shares transferred into one’s account as soon as one presses the buy button on the screen. In the rolling settlement system, the sum or trades executed on any day are settled on successive dates, on a continuous basis, rather than settling the sum of trades on predetermined, specific dates. In other words, today’s trading system does not have a specific X day to settle trades.
Today, in India, both the stock exchanges, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), use the rolling settlement system to settle trades in listed securities. The settlement cycle for securities in India is T+2 days, where ‘T’ is the date on which the trade is executed. After the date of the trade execution, it takes two additional trading days to complete the settlement, hence the ‘+2’. For instance, if one executes a trade on Monday, it will be settled on Wednesday. However, trades executed on a Thursday or a Friday will be settled the following week since Saturday and Sunday are not trading days.
The system of rolling settlement in India was first adopted by the NSE after the establishment of the exchange. At the time, it was a T+5-day settlement cycle. Eventually, in the late 90s, the BSE also adopted the T+5-day settlement system. From T+5, the Securities and Exchange Board of India (SEBI) shortened the cycle to T+3 before changing further, shortening it to T+2. Now, we look forward to moving to a T+1 system.
Lastly, in addition to the rolling settlement system, the NSE and BSE also have a system in place to handle failed trades, which are trades that are not settled on the settlement date due to various reasons, such as insufficient securities or funds. This system, known as the Trade Guarantee Fund, provides a mechanism to compensate investors in the event of a failed trade.
Effect of the Rolling Settlement on Intraday Traders
However, if one is an intraday trader, one must be aware of the following regarding intraday trading.
In intraday trading, there is no settlement since there is no transfer of shares into/from the trader’s Demat account. Intraday trading doesn’t entail the delivery of shares into the buyer’s account. Likewise, sellers selling intraday are not selling stocks from their Demat account. Intraday traders square off their positions on the same day, and hence, they don’t have to go through the T+2 day rolling settlement system.
The T+2 system is only applicable to retail investors engaging in delivery trading. Traders must remember to close all their open positions before the end of the trading system, or else the shares will be transferred to their Demat account, and that will lead to settlement.
Meaning of Pay In and Pay Out
Let’s look at two important concepts related to rolling settlements: pay in and pay out. In simple words, pay in is the day when the exchange receives securities sold by the seller and funds by the buyer. On the other hand, pay out is when the buyer receives the securities they purchased in their demat account. Likewise, it also happens when the seller receives their payment for the securities. In the T+2 system, both the pay in and pay out happen on the second date post the transaction date.
Advantages of the Rolling Settlement
The rolling settlement system has some advantages over the account settlement system. In the account settlement system, an extensive volume of trades was settled on a single day. This increased the number of pay in and pay out. On the other hand, in the rolling settlement system, trades conducted are settled independently of future transactions. This reduces the volume of shares settled relative to the account settlement system. In addition, that also makes the rolling settlement system more efficient since the delivery of shares and funds is quicker compared to account settlement systems.
Conclusion
The blog post aims to provide clarity on the rolling settlement method and its importance in ensuring the smooth functioning of stock markets. The standard practice of rolling settlements in India has been in place for a significant period, but the system is constantly reviewed to improve its efficiency.