Rolling Settlement in Stock Markets: An Overview for Investors

Stock trading attracts traders who are looking for higher returns in the market. In contrast to buy-and-hold investors, intraday traders stay invested for a considerable period of time. To profit from price movements, intraday traders buy and sell stocks multiple times during a trading session. Understanding market functionalities is crucial for anyone who wishes to trade successfully. Among these aspects is the trade settlement process, which directly affects your trading strategy. In this article, we will understand rolling settlement in stock markets.

Understanding Rolling Settlement

Rolling settlement is the standard method of settling trades on the exchange. Essentially, it refers to a settlement system where securities traded at the current time are settled on successive days. Indian stock exchanges currently use rolling settlements for trade settlements. Several years ago, NSE settled securities weekly, processing them every Thursday. The weekly settlement system was replaced by the T+3 settlement policy, where T is the date the trade occurred. Currently, the system is T+2 days. So, securities exchanged on Wednesday are settled on Friday, and securities exchanged on Thursday are settled on Monday (Saturdays & Sundays are weekly holidays).

Rolling Settlement Example

Assume trader A purchased 100 shares on March 1. Following the T+2 settlement system, the settlement day falls on March 3, when trader A will have to pay in total, and the shares will be credited to his account. In contrast, the seller who made the transaction will deliver the stocks to the trader on March 3. On the second day after a trade, equities will be debited from the seller’s account and credited to the buyer’s.

Settlements do not take place on intervening holidays, such as bank holidays, exchange holidays, and Saturdays and Sundays, which are public holidays.

Who is affected by the Rolling Settlement?

Rolling settlements do not affect intraday traders or institutional investors, who are exempt from squaring off. It affects retail investors on trades that occupy positions over the course of a night or more. The pay-in and pay-out take place within T+2 days in that case.

Rolling settlement involves mandatory settlement of any open position at the end of the trading session on T+n days. Currently, T+2 settlement cycles are followed.

Understanding Pay-in/Pay-out

A rolling settlement involves pay-ins and pay-outs. Pay-in is the day when securities sold by sellers are transferred to the stock exchange. As well, the money paid by buyers gets remitted to the exchange.

On the pay-out day, the buyer receives the securities in his account, and on the same day, the seller receives the payment. According to the current rolling settlement system in the stock market, pay-in and pay-out take place on the second working day following the transaction date.

What are the advantages of Rolling Settlements over account settlements?

As compared to the earlier account settlement system in which all trades were settled on a fixed date, rolling settlement carries less risk.

In the account settlement method, the volume of trades settled on a single day was high, automatically increasing the number of pay-ins and pay-outs and complicating the system.

In contrast, in rolling settlement, transactions on a day are settled separately than those on the following day, reducing settlement risks to a large extent.

As a result of the current system, securities are delivered to buyers more quickly, and remittances are remitted to sellers more promptly. This improves the overall efficiency of the stock market.

A trader can find out when a trade has been settled by checking their trade confirmations, settlement status reports, account statements or receiving updates from their brokers.

Conclusion

In rolling settlement, trades are cleared over a period of time. It replaced the previous account settlement method, which involved all settlements occurring on the same day. By reducing settlement risk, it enables pay-ins and payouts to happen faster. Rather than waiting for the specific settlement date, the trades can hit the trader’s or investor’s account immediately after they occur, with a rolling settlement. Currently, Indian exchanges follow the T+2 rolling settlement cycle, where trades are settled two days after the current date. The smooth functioning of the stock market depends on the smooth settlement of trades. Indian rolling settlements have been standard for a considerable time now, but the system is constantly being reviewed to improve its efficiency. If you are new to the stock market, you might consider using an online trading app like BlinkX. It has an intuitive navigation that makes it easy to access and understand stock market information. In addition, they provide valuable insights into investing