Frequently Asked Questions (FAQs) and Answers in Securities Trading and Settlement
1) Who are the stakeholders in Trading in capital markets?
Trading in capital market takes place between the buyer and seller but there are many intermediaries in between. These intermediaries like brokers, dealers etc facilitate the trade.
Buyer is the one who wants to buy a security in spot market or the future market. Buyer has the option of providing a price to buy the security or can just buy at the market price.
Seller of the security has the possession of the securities (or shares of a company) and intends to sell it to the buyer. Seller also has the option of providing a price to sell or can sell at the price prevailing in the market.
Brokers are intermediaries between Buyers and seller who facilitate the trade. They provide the platform for trading and earn by taking their commission (in the form of maintaining the securities accounts of buyers and sellers). The brokers also charge commission on every trade.
Dealers are also the intermediaries that facilitate the trade but they are different from broker because the dealer is a person who buys and sells securities on their own account. On the other hand, a broker is one who buys and sells securities for their clients.
2) What are the types of orders?
Broadly orders can be divided into active orders and passive orders.
Active orders are basically those orders which try to find the best possible match and these orders are successfully transacted in most of the cases.
Passive order on the other hand is subjected to delay in execution in most of the cases as they are not meant to be executed at the market price.
Orders lying unmatched in the system are ‘passive’ orders and orders that come in to match the existing orders are called ‘active’ orders. Orders are always matched at the passive order price. This ensures that the earlier orders get priority over the orders that come in later.
3) What is trade settlement?
Trade settlement refers to the day when actual transfer of money takes place from buyer to the seller and actual transfer of securities takes place from seller of securities to buyer of securities. Settlement means that these securities are now legally changes hands and are now booked at a depository (so final settlement in case of Indian markets is in NSDL or CDSL). Trade settlement allows time for the paperwork and smooth transaction. The trade starts on trade date but the actual transaction takes place later based on the settlement period which depends upon the type of the security. In India, the settlement takes place on a T+2 basis which means 2 days after trading, the settlement takes place. Also, check this article to better understand the securities trade lifecycle.
4) What is settlement period?
Settlement period is the time between the transaction date and the settlement date between the buyer and seller. The buyer must make payment within the settlement period, while the seller must deliver the purchased security within this period. The settlement period is often quoted as T+1, T+2 or T+3; which means the transaction date plus one, two or three days.
5) What are the different agencies involved in the settlement process?
There are major three kinds of agencies in the settlement process which are-
- Clearing banks which are responsible for covering bulk of trading and also provide stock lending facility
- Depositories which are responsible for settlement of dematerialized security
- Professional clearing members are responsible for clearing and settling trade for their own clients.
Learn more about how settlement process at NSE (National Stock Exchange of India) works.
6) What are the risks involved in the settlement process?
Counterparty risk involved in the settlement process is the risk that the other party will not transact and lead to cancellation of the transaction.
System risk is the risk due to the errors, frauds and outages which lead to failure of the settlement process.
7) How many types of settlement are there?
The following are the types of settlements-
- Rolling odd lot
- Company objection
- Auction rolling
- Rolling market lot
- Bad delivery
- Auction physical
About the Author:
The Author Ashish Khare is pursuing his MBA in Finance from a leading business school in India – MDI Gurgaon. He takes keen interest in financial markets having interned with RBI (Reserve Bank of India). Ashish recently qualified CFA Level 2 (Chartered Financial Analyst).