Understanding Rolling Settlement in the Stock Market

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In stock trading, there exist two categories of traders: those who purchase and retain stocks for extended periods, and those who partake in daily trading. Those involved in trading within the span of a single day are called intraday traders. They conduct multiple stock transactions in a solitary trading day, with the goal of gaining from the changes in stock prices. To thrive in trading, having a grasp of how the market operates is crucial.

A vital aspect of this understanding is the process of finalising trades, closely connected to your trading strategy. In this article we will explore the rolling settlement method used in the Indian stock exchanges. As we navigate the nuances of this process, you’ll uncover the mechanics that drive successful trading strategies, providing you with the insights required to successfully ride the ups and downs of the stock market.

Exploring Rolling Settlement

Imagine you’ve just gotten some shares in a company, and you’re hoping they become more valuable in the future. Now, think about how these shares go from the person who sold them to you, becoming yours. This process marks the advent of the rolling settlement concept. In essence, rolling settlement is a mechanism integral to the stock market. It facilitates trade settlement and the seamless transition of ownership concerning securities.

The settlement cycle in the stock market refers to the timeframe during which these ownership transitions materialise. Within a rolling settlement framework, this cycle is much shorter compared to the traditional system. Trades get settled following a T+n* schedule, signifying that ownership transference happens within ‘n’ business days post the trade date. This fast settlement process makes transactions quicker and smoother, which helps the market work better.

Impacts of Rolling Settlement

You might wonder about the stakeholders impacted by the rolling settlement system. The rolling settlement doesn’t impact intraday traders or big investors who don’t have to square off. It matters for regular investors who hold their trades overnight. In such cases, the money and shares exchange happens by the second day (T+2). 

With the rolling settlement, if you have any trades still open when the trading day ends, they have to be settled within the next few days (T+n days). Right now, the system follows the T+1 cycle for settling trades for most stocks.

Deciphering Pay-in and Pay-out Mechanisms

As you step into the world of trading, you’ll become acquainted with the terms “pay-in” and “pay-out.” These terms revolve around the movement of money and items like stocks, based on whether you’re purchasing or selling. During the pay-in, you need to add the correct amount of money to cover your purchase.

On the flip side, during the pay-out, things work the opposite way. If you’re selling shares, you receive the money from the sale. The rolling settlement system looks after all of this, ensuring that the pay-in and pay-out processes occur seamlessly and swiftly.

Transitioning to T+1 Settlement Cycle

In July 2001, SEBI initiated the rolling settlement system, replacing the fixed cycle marred by delivery issues and distrust. Starting with certain scrips following the T+5 settlement, extended to all by Dec 2001. Evolution led to T+3 by Apr 2002, then T+2 by Apr 2003, aiming for T+1 now.

In Sep 2021, SEBI allowed T+1 settlement for equities from Jan 2022. NSE, BSE, and MSE announced phased T+1 adoption from Feb 25, 2022, for the lowest 100 stocks, expanding to the bottom 500 monthly till Jan 2023. On Jan 27, 2023, India’s equity market shifted to T+1. Recently, SEBI announced full T+1 for all scrips from Oct 1, 2023, catapulting India as a pioneer in this rapid settlement trend.

Advantages of Rolling Settlement Over Account Settlement

Now that you’ve absorbed the foundational elements of the rolling settlement, a natural query might arise regarding its superiority over the conventional account settlement technique.

The rolling settlement method is safer compared to the old account settlement way, where all trades were settled on one fixed day. Unlike account settlement, where traded securities were settled on a fixed date, rolling settlement uses an ongoing process. In this system, the securities traded the day before are processed before the securities traded on the current day, and this pattern continues. 

In the account settlement method, many trades were settled on the same day. This made the process more complicated with lots of pay-ins and pay-outs. On the other hand, in rolling settlement, trades on one day are settled differently from the ones on the next day. This way, the risks of settling are much lower.

Overall, the current system makes it faster to give stocks to buyers and money to sellers. This helps the stock market work better and is more efficient.

Conclusion

Navigating the dynamic world of stock trading demands a comprehensive understanding of mechanisms like the rolling settlement system. It simplifies the intricate process of securities ownership transfer, making it quick and efficient. As you embark on this journey, armed with knowledge about rolling settlement, you are poised to make informed decisions and enhance your market participation.

Remember, the significance of rolling settlement extends beyond the confines of this blog. Embrace the knowledge you’ve gained and let it be your compass, guiding you through the whirlwind of stock trading. In this journey of risk and reward, understanding the inner workings of the rolling settlement system could very well be the key to unlocking your success in the ever-evolving world of stock trading.

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