Financial Daily from THE HINDU group of publications
Sunday, Sep 14, 2003
Financial Daily from THE HINDU group of publications Sunday, Sep 14, 2003 |
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Investment World
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Stock Markets Markets - Stock Markets Columns - Simple Economics Stocks in trade-for-trade B. Venkatesh
The trade-for-trade segment is form of settlement system. Suppose you buy, say, 1,000 shares of a stock at Rs 25 per share. Before the close of trading that day, you decide to sell these 1,000 shares for Rs 30 per share. You have gained Rs 5 per share less brokerage. This is the amount you will receive from your broker in the normal rolling settlement system. But if the same stock is under the trade-for-trade segment, you will have to pay Rs 25,000 to take delivery of the shares you bought. Similarly, the quantity you have sold will have to be presented for delivery. The trade-for-trade segment considers each transaction individually. Why have the stock exchanges decided to shift stocks to this segment? The reason is that the exchanges want to curb circular trading in certain stocks. Suppose a group of traders decides to push the price up by creating volumes in a certain stock. They can buy and sell a large quantity of that stock to push the price to higher levels. Buying and selling large quantity of the stock may not entail high cash outlay because the rolling settlement system allows for netting of buys and sells made during the day. Now, retail investors may enter the stock when they notice such high volumes and rising prices. That is when the operators take profits and leave the stock to decline in value. When such stocks are shifted to the trade-for-trade segment, traders who indulge in circular trading will have to pay for the total purchases. The large cash outlay is expected to deter traders from engaging in circular trades.
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