Never heard before

[bvpraveen]

nope, the buyer receives the penalty

Interesting. Why does the buyer receive it?

As the seller had defaulted, does it take more time for the buyer to receive the shares? Is this the reason for the buyer being given the penalty money?

Thanks man.

 

[swagat86]

nope, the buyer receives the penalty

strange i never got any money from ICICI, shud i go and catch them.
buyer gets his shares.ryt,

then y shud he get the penalty??????????



tanks err.. thanks

 

[supaTrade]

OK Let me explain.

There is a institution called the clearing corporation which looks after the settlement of the order executed by the exchanges. If seller defaults i.e. does not deliver the shares, the clearing corp. delivers its own shares to the buyer. If it doesnt have them it buys them at the auction and delivers them to the buyer. Hence the seller has to pay the clearing corp the price of the shares that have to be bought from the market plus a penalty to deter him from repeating the mistake.

Tha penalty is the same for all stocks. Its is calculated as follows :
The seller has to pay the highest price on T+2 day plus a 20% penalty. Eg. If a seller shorts 10 stocks at Rs 100. He recieves Rs. 1000. If he fails to deliver the stock, it goes into auction. Suppse the stock goes to Rs. 110 on T+2 day then he will have to pay the clearing corp Rs. 110+20% for each share i.e. Rs. 1320 to buy the shares for the buyer. Buyer will recieve the next day in demat i.e. T+3 day.

Hope it is clear now.

 

[bvpraveen]

...
The seller has to pay the highest price on T+2 day
...

1. But I've read from jdm's reply in some other thread that, the closing price of previous day will be used in auctions.

2. When the previous day's close is taken for auction, what will be done when the price is above/below the previous days close?

jdm/supaTrade, can you please clarify?

Thanks,
Praveen.

 

[Trader07]

I suspect that its the broker who makes the most money in the case of a
short sell trade.

A broker would rarely want the shares to go into auction. Instead, the broker would try to

(1) borrow shares from Clearing Corp at a specified rate of interest,
(2) deliver the borrowed shares to the Exchange before the auction.
(3) collect a hefty sum from the short seller ( highest price + 20% penalty)
(4) buy the shares from the market at a lower price
(5) return the recently purchased shares to Clearing Corp within stipulated date

rgds
T7

 

[jdm]

for every buyer there is a seller and vice-versa. the borkers, exchnge, clearing corporations acts as an intermidiatory\facilator between the buyers and sellers. nothing more.

now suppose the seller fails to deliver the share, for whatever reasons may be, the first question asrises how the buyer (who already paid the money as per settlement schedule) gets his money back (and also gets compensated for the oppurtunity loss).

to address the same the exchage initiates an auction, where the seller (who has defaulted to provide the shares which he sold earlier) is bound to buy the shares back. in addition he pays an penalty, (5% in case if the shares belonging to EQ series). the whole proceeds, including the penalty is received by the buyer.

hope it clarifies.

cheers,
jdm.

p.s. - there has been thread on auctions, pls refer those for details

 

[swagat86]

for every buyer there is a seller and vice-versa. the borkers, exchnge, clearing corporations acts as an intermidiatory\facilator between the buyers and sellers. nothing more.

now suppose the seller fails to deliver the share, for whatever reasons may be, the first question asrises how the buyer (who already paid the money as per settlement schedule) gets his money back (and also gets compensated for the oppurtunity loss).

to address the same the exchage initiates an auction, where the seller (who has defaulted to provide the shares which he sold earlier) is bound to buy the shares back. in addition he pays an penalty, (5% in case if the shares belonging to EQ series). the whole proceeds, including the penalty is received by the buyer.

hope it clarifies.

cheers,
jdm.

p.s. - there has been thread on auctions, pls refer those for details

tnx joy da

 

[bvpraveen]

Thanks Joy.

I searched the forum and also went through NSE website. The latter has clearly defined everything. The following excerpt is taken from NSE (http://www.nseindia.com/content/nsccl/nsccl_eqcloseout.htm#1)

Shortages Handling
Close-out Procedures

All shortages not bought-in are deemed closed out at the highest price between the first day of the trading period till the day of squaring off or closing price on the auction day plus 20%, whichever is higher. This amount is credited to the receiving member's account on the auction pay-out day.

All doubts got cleared.

Thanks all,
Praveen.

 

[uasish]

At least in one occassion i benefited ,after short selling the stock really went for a toss .Hence the closing price of the precceding dt of the aution dt was way below.In ODIN software ,the auction bid / ask can be seen.