The world of stock trading is an exciting one that attracts traders who flock to the market for higher returns. Intraday traders lie in the opposite pole of buy-and-hold investors, who stay invested for a considerable period. Intraday traders would buy and sell stocks multiple times in a trading session to profit from price movement. For anyone to trade successfully, understanding market functionalities is crucial. One such aspect is the trade settlement process, which has a direct relation to your trading strategy. This article discusses the rolling settlement followed in the Indian stock exchanges.
Rolling settlement is a standard method of settling trades in the exchange. It refers to a system where securities traded on the current date are settled on successive dates. In contrast to account settlement, where traded securities traded were settled on a particular date, rolling settlement adopts a continuous settlement process. In the rolling settlement system, securities traded yesterday get processed a day before the securities traded on the current date, and so on.
Understanding rolling settlement
Rolling settlement is the current trade settlement process in Indian bourses. Several years ago, NSE followed the weekly settlement process, and all securities were processed every Thursday.
The weekly settlement system got replaced by the T+3 settlement policy, where T is the date the trade occurred. The current system, however, is the T+2 days. Hence, securities exchanged on Wednesday are settled on Friday, and securities transacted on Thursday get processed on Monday, the next working day (Saturdays & Sundays are the weekly holidays), and so on.
Let’s understand with an example.
Presume, trader A purchased 100 shares on January 1. So, following the T+2 settlement system, the settlement day falls on January 3, on which trader A will have to pay in total, and the shares will get credited to his account. On the other hand, the seller who made the transaction will deliver the stocks to the first trader on January 3. So, on the second day from the day of trade, equities will be debited from the seller’s account and credited to the buyer’s Demat.
It is important to note that settlements don’t happen on intervening holidays, including bank holidays, exchange holidays, and Saturdays and Sundays, which are weekly holidays in the bourses.
Who does the rolling settlement affect?
The rolling settlement doesn’t affect intraday traders and institutional investors, who are exempted from squaring off. It affects retail investors on trades that occupy positions across one night or more. In that case, the pay-in and pay-out get carried out by T+2 days.
Under the rolling settlement system, any open position at the end of the trading session leads to mandatory settlement on T+n days. The current regime follows the T+2 settlement cycle.
What does it mean by pay-in/pay-out?
Pay-in and pay-out are two vital concepts related to the rolling settlement.
Pay-in is the day when securities sold by sellers get transferred to the stock exchange. Similarly, the money paid by the buyers gets remitted to the bourse.
The pay-out day is when the buyer receives the securities in his account, and in the same way, the seller receives the payment. In the present rolling settlement in the stock market, pay-in and pay-out happen on the second working day from the transaction date.
Why is the rolling settlement system better than account settlement?
Rolling settlement carries less risk than the earlier method of account settlement system when all trades were settled on a fixed date.
Obviously, in the account settlement method, the volume of trades on a single day settled were large, automatically increasing the number of pay-in and pay-out and adding to the already complex system.
Conversely, in the rolling settlement method, trades conducted on a day are settled separately than transactions occurring the next day, eventually reducing settlement risks to a great extent.
Finally, the current system is responsible for making the delivery of securities to the buyer and remittance to the seller more prompt, improving the overall operational efficiency of the stock market.
- Rolling settlement is the clearing of trades over a predetermined series of dates.
- It replaced the previous account settlement method, where all settlements happened on a specific date.
- It allowed pay-in and pay-out to happen faster and reduced settlement risk.
- The Rolling settlement allows trades to hit the trader or the investor’s account soon after they occur rather than waiting for the specific settlement date.
- Indian bourses currently follow the T+2 rolling settlement cycle where trades that occurred on the current date get settled two days later.
Today when money transfer occurs instantly, the settlement period remains unchanged both as a rule and convenience for traders, brokers and investors.