Investment in the trading market can be a highly profitable proposition for young and experienced traders alike. One problem that is regularly faced by the less experienced investors in the trade market is specific terminologies that are prevalent in the market. Be it some of the basic concepts like a bear market, averaging down, or the slightly more complex ones like a trade to trade; one needs to know the ins and outs of all these terms to take advantage of the market and get attractive returns fully.
In this article, we will specifically discuss the concept of trade to trade settlement in the market. However, in order to understand the concept clearly, you will also need to be aware of other concepts like trade date and trade and settlement. The following is a brief introduction to these concepts.
What is Trade Date?
The exact date of the execution of a particular order is considered to be the trade date. The trade date is not only limited to the purchase of a specific share or security, but it also involves the date of sale or acquiring as well. Therefore, for every transaction that is carried out in the market a trade date is determined.
The concept of trade date is vital in case of any type of security which includes equities, bonds, instruments, foreign exchange, futures, and commodities. When discussing the trade date, it is essential to know that the exact time of the trade too can prove to be pivotal. The majority of the trades in India and abroad happen during the market hours; these are recorded with the day’s trade date. On the other hand, those trades that occur outside the working hours of the market could have a different trade reporting. On such occasions, trades are either recorded with the date of the following day or in case of a holiday, the next working day.
Relationship between Trade Date and Settlement
The date of trade is one of the two most important aspects involved in a market transaction. While the trade date records and then initiates the transaction, the date of settlement is the date on which the transfer between the two parties is executed. The period between the trade date and the settlement date is popularly known as the settlement period. There are certain instruments in the market which can be settled on the day itself; there are others which needs a considerable amount of time for the process to be completed. The Securities and Exchange Commission in 2017, set the rule that settlement of bonds, stocks, exchange-traded funds, municipal securities, and certain mutual funds should be completed within two days of the date of trading. This rule is known as T+2 days rule.
When looking at the concept of Trade to Trade Settlement, the difference is mainly found in the rules related to the trade date. It is here that it differs significantly with the traditional settlement model that is the rolling settlement. Let us delve deeper into the two concepts.
What is Trade to Trade Settlement?
Trade to trade settlement is a particular segment that is used only for trading shares on the compulsory delivery basis only. Many investors make the mistake of thinking that a section like the trade to trade settlement can be utilized on a daily basis. You must thus know, that is not an option as it is not possible to trade, trade to trade shares on intraday. Every share that is part of this segment when either purchased or sold, should be taken delivery of by paying in full only. This is why in many cases investors are discouraged from trading in this segment.
In addition to the payment, another piece of information that every trader should know when considering the trade to trade settlement is that there is no scope for netting off for the day as it is not permitted. The settlement of scrips that is available in the trade to trade segment is strictly done on a trade for trade basis. It is therefore that the investors understand and analyze the differences between regular rolling settlement and trade to trade settlement and not take a decision in haste as this could then cause inconvenience to all parties involved.
Example of Difference between Rolling Settlement and Trade to Trade Settlement
It is possible for an investor to trade stocks intraday under the rules and regulations of regular rolling settlements. This means that under normal circumstances one can buy particular security and sell it on the same day. This is where trade to trade settlements differ.
So under the regular rolling settlement, if an individual purchases 500 shares of company A at a price of INR 50 per share, and sold all 500 shares at INR 60 per share, on the same day before the close of trading, then that person would end up making a profit of INR 10 per share, and INR 5000 in total. In such a case the individual will get exactly that amount from his or her broker. This is, however, not the case when it comes to trade to trade settlements.
In a separate scenario, if the same individual were to purchase 500 shares of company A at a price of INR 50 per share, in a trade to trade segment, then the individual would have to pay INR 25,000 on the day of purchase to take the delivery of the shares that he had bought. Similarly, if the individual were to sell the shares on a particular day, then he or she would have to be presented with the purchase value for delivery of the shares on their Demat account. Therefore, when looked at it from an objective point of view, the primary difference between a trade to trade settlement and a regular rolling settlement is that in case of the former, each transaction is considered independently, whereas, in case of the latter, that is not necessarily the case.