SEBI is the supreme authority when it comes to stock trading in India. It gives orders and undertakes investigations which are required for the stock market to function smoothly. The Security Exchange Board Of India has been undertaking various norms and rules right now to make the markets free from any false reading or cheating scenarios. It is looking to make the market an unbiased place for retail investors as well as big investors.
What is the Trading Cycle ?
Trade cycle into consideration now is dependent on the stock purchases and trades regarding other cash purchases (Not futures). It can also be referred to as a simple business transaction. In any business there is a different type of credit limit. For example there is something called cash sales. This refers to paying the money immediately once the purchase is made. In some businesses there is a credit limit of 1 week, 14 days, 1 month, 2 month and 3 months depending on the nature of business.
The same thing is applicable in the Stock market. Once a purchase is made in the market a person is given the time limit of T+2 days in the current scenario (before change) to pay the entire transaction in full. This means that a margin needs to be paid upfront equaling to 30% or differing as per the broker and the client gets 2 days to pay the amount in full. If not done on time the position gets squared off by the broker’s terminal.
Hence trading cycle is like other business cycles that occurs during a course of taxation of goods. The only difference is that in such cycles a fixed margin needs to be paid before purchase based on the value of the stocks. This is how the trading cycle works.
The recent change from SEBI comes at a time when the market is almost at the top of all time with a bull rally of 1500 points. The market has cruised to this level within one month. Also the last 2 weeks have shown an addition of more than 1000 points in the Nifty50 Index. Among such a wave of green zone the SEBI has introduced a new rule of trading cycle completion. Previously the trades needed to be executed full and final within 2 days but now the brokers have the liberty to go for a T+1 settlement as well. This means that the brokers can charge the clients for T+2 or T+1 whichever is convenient from their side. From January, 2022 the rule for T+1 trade is to be applicable.
The Brokers can adopt any of the options available to them. But there is one additional rule applied to them. If the exchange opts for T+1 cycle then such a rule will stay applied on it for a minimum of 6 months. Hence once applied the change for cycle cannot be made for another 6 months. Hence the request from Brokers has been heard and the settlement period for T+1 or T+2 is available for the exchanges. Now the brokers have to follow the steps of the exchanges. This means that if an exchange opts for T+1 cycle then trades done through it would be executed and completed with the same cycle. Hence scripts registered or traded through that exchange will be settled within T+1 duration.
What Will this Mean for the Shareholders ?
The move will determine a lot of things for the exchanges and their business. If one exchange chooses for T+1 cycle and another opts for T+2, then the shareholders would definitely register more with the T+2 cycle. This will give them an extended credit line of one day to settle their trades. This will also give them one more day as an opportunity to decide whether they want to execute the trade or square it off.
If both the exchanges opt for T+1 cycle, then it would be a real mess for the retail investors. Previously with more days to settle the trade, the traders got an opportunity to take higher risks at margin payments. But now they need to settle the transaction, hence this would mean that no more risks would be taken on the scripts and that would reduce the volatility in the markets.
Yes, such a step is definitely going to cause low volatility as the market responds to the demand and supply equilibrium. The scalp traders will have no effect on such trading patterns, but the traders who opt for taking security into consideration for one or two days for profits have to change their entire algorithm for execution of trades. Thus this step can be brutal for the markets and can cause a loss of volatility if the exchanges opt to take the T+1 mode of trading cycle.