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New online craze: Buy Today, Sell Tomorrow

Janaki Krishnan & Anusha Subramanian

Online trading portals are pulling out all stops to ensure that their clients get all the accommodations which offline brokers give them. The latest product to become popular is where customers can sell securities bought the previous day even though the shares are not yet credited to their demat account.

However, if delivery has not taken place then the onus fall on the investor to make good the shortfall. While Indiabulls.com claims to have this product right from the time it started its portal, ICICIDirect.com commenced this product called 'Buy Today Sell Tomorrow' in March this year. The other leading portal Sharekhan.com is yet to offer this facility to its customers.

Under the current T+3 rolling regime, the shares are credited to the demat account on the fourth day from the day of the trade.

A typical transaction will be settled by payment of cash and delivery of the securities after three working days by the exchange.

Stocks bought on Monday would require the funds to be paid-in to the exchange on Thursday and securities delivered by the exchange on the same day and vice versa. So there is a time gap of three days between buying and actually receiving the securities.

Therefore the investor, though carrying the market risk over the bought securities, does not have any control over his portfolio in the intervening period, as he cannot sell without actually possessing the stocks.

However with BTST investors now have the facility to sell the shares, which they are due to receive, on the first (T+1) and second (T+2) days after the transaction.

BTST operates on the premise that payout for buy trade would be one day prior to the pay-in for sell trade. This often result in more delivery based trades as the investors are equipped with the freedom to close their position anytime in the intervening period should the need be, without waiting for the actual delivery.

Anup Bagchi, chief operating officer of ICICIDirect.com, said cash trading volumes of his portal have shown a distinct upward trend since the introduction of the product.

The portals are however treading carefully on this product due to the risk associated especially when the investor does not get delivery of the shares bought. There are two major risks: a) the securities are delivered short by the counter party to the first trade, and b) the pay-in and payout for the two consecutive settlements are merged due to some reason.

Gagan Banga of Indiabulls.com said, "Since the pay-ins are conducted before the pay-outs, this will result in the shortage of delivery. The exchange conducts auction to cover up the shortfall in the securities pay-in. And in case sufficient securities are not rendered, the exchange debits the defaulting member and credits the receiving member an amount calculated on preset parameters."

He said the risk in the process would be in the event of the scrip rising continuously. "The investor would stand to lose on the differential basis, also exposing the broker to the risk if a prudent risk management system is not in place and the investor defaults on payment," Banga added.

Portals offering this product stress on risk management measures to protect the brokerage as well as the investors themselves. For instance, ICICIDirect allows only between 50 to 70 per cent of the shares purchased to be sold under BTST.

Further, only those scrips that are considered to be liquid belonging to S&P CNX Nifty and CNX Nifty Junior are allowed to be traded under BTST.

Still, in spite of all these safeguards, "in an extreme case, if the short delivery occurs the investor will have to make good the losses, if any, as in the case of any kind short delivery," says Bagchi. The possibility of stocks going into auction "is a mere half a percent", says Banga.

In case of short delivery the stock goes into auction and the clients bear the loss for short delivery. Indiabulls.com all takes the added precaution of blocking the margin.

The transaction is run on the assumption that the maximum risk pertaining to the short deliveries are two circuits against the position of the subjected investor. So the system is geared to monitor the positions online and generate graded alert calls for topping the margins.

Sharekhan officials said that they were not ready to offer the product since it involved a lot of risk and changes would have to be made in their software to incorporate the facility. But they admitted that with some of the other online brokerages offering it, their business was getting affected.

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