What Is "Trade for Trade" in Stock Markets?
Learn what "Trade for Trade" is in stock markets, its key characteristics, and how it differs from the rolling settlement system.
"Trade for Trade" is a specific settlement mechanism used in the stock markets to ensure that each transaction is settled individually and mandatorily through the delivery of stocks. This system is significantly different from the typical rolling settlement system where netting of transactions is allowed, and traders can buy and sell stocks on the same day without mandatory delivery.
Key Characteristics of "Trade for Trade"
Mandatory Delivery
In the "Trade for Trade" segment, every buy or sell transaction requires the actual delivery of shares. If you buy shares, you must take delivery by paying for them, and if you sell shares, you must deliver them to the buyer. This mechanism prevents the netting off of positions, which is common in intraday trading.
No Intraday Trading
Because every transaction must result in the delivery of shares, intraday trading (buying and selling the same stock on the same day) is not allowed in the "Trade for Trade" segment. This restriction is intended to reduce speculative trading and volatility in stocks listed under this segment.
Surveillance Measure
Stock exchanges often place stocks in the "Trade for Trade" segment as a surveillance measure. This can happen if there are concerns about excessive volatility, speculative trading, corporate governance issues, or other factors that might compromise market integrity. The mechanism is designed to protect investors by ensuring that every transaction is backed by the actual transfer of shares.
Settlement
Transactions in the "Trade for Trade" segment are settled on a trade-to-trade basis, meaning they are settled individually without netting. This is typically done on a T+2 settlement cycle, where transactions are settled two business days after the trade is executed.
Example
For instance, a company's stock listed under the "Trade for Trade" segment on the Bombay Stock Exchange (BSE) or the National Stock Exchange of India (NSE) cannot be traded intraday. If an investor purchases 100 shares of this company, they must pay for these shares and take delivery. Similarly, if selling, they must ensure they hold the shares for delivery. This system ensures that speculative activities are minimized, and the trade reflects a genuine transfer of ownership.
Conclusion
The "Trade for Trade" settlement mechanism plays a crucial role in maintaining the stability and integrity of the stock market by mandating the physical delivery of every transaction, thereby reducing speculative trades and ensuring that stock prices reflect genuine buying and selling interest.