Trade-to-Trade (T2T) Stocks: Meaning, Criteria and How to Trade?

One of SEBI's primary functions is protecting investors’ interests. SEBI implements various measures and guards to safeguard investors, especially retail investors, from perils like price manipulation and insider trading. The trade-to-trade stocks segment is a segment introduced as part of these measures. Have you heard of them? Learn about Trade-to-Trade (T2T) stocks in this blog and enhance your trading journey.

What are T2T Stocks? 

The Trade-to-Trade (T2T) segment in Indian stock markets is a category where shares can only be traded for delivery and cannot be traded intraday. Stock exchanges implement this segment to curb speculative trading and ensure genuine transactions. 

How to Trade in the T2T Segment? 

The first step in trading the T2T segment stocks is understanding their meaning and the restrictions SEBI imposes on them. 

• Identifying T2T Stocks - T2T segment stocks are shown separately on NSE and BSE. NSE shows T2T stocks as ‘BE’ Series Stocks, while BSE classifies T2T stocks as under ‘T’ group of stocks.

• Compulsory Delivery of T2T Stocks - All trades in the T2T segment stocks must result in delivery. This means that traders must take delivery of the shares they bought in their demat account. 

• No Intraday Trading of T2T stocks - Intraday trading (buying and selling on the same day) is not permitted in T2T stocks. Every buy or sell order will result in a settlement per the settlement cycle mentioned under SEBI rules.

• Settlement Cycle - Although the Indian stock markets are moving towards the T+0 settlement cycle (beta version), T2T segment stocks are subject to a rolling settlement cycle of T+1 days. Shares purchased will be credited to the demat account by the next business day after the trade date; similarly, shares sold must be debited from the demat account by the next business day after the trade date. 

• Margins and Penalties - Traders must ensure they have sufficient margins and the target shares in the Demat account before trading in T2T stocks to avoid penalties. Failure to deliver shares on the settlement date can result in auction penalties, which can be financially severe.

Criteria for Shifting the Stocks in the Trade-to-Trade (T2T) Stock Segment

The decision to move stocks to the Trade-to-Trade (T2T) segment is based on specific criteria determined by stock exchanges in consultation with the Securities and Exchange Board of India (SEBI). Here are the three main conditions:

P/E Over-Valuation

The price-to-earnings (P/E) ratio is critical in deciding whether a stock should be shifted to the T2T segment. The Price Earnings Multiple (P/E) should be less than 0 or greater than or equal to a specific upper limit (with a minimum of 25). The upper limit depends on the index P/E on the relevant date. For example, if the Sensex P/E ranges between 15 and 20, a stock with a P/E over 30 could be moved to T2T. This measure helps in curbing speculation in overvalued stocks. The earnings per share (EPS) used in the P/E calculation is typically based on the last four quarters.

Price Variation

Substantial price variation compared to benchmark indices like the Sensex or Nifty can also lead to a stock being moved to the T2T segment. If a stock's value is approximately 25% higher than the benchmark indices or sectoral indices, it may be shifted to the T2T segment. This criterion controls speculative trading in stocks that experience significant price swings, ensuring more stable trading.

Market Capitalisation

Market capitalisation is another important factor. Stocks with a market cap less than or equal to Rs. 500 crores are candidates for the T2T segment. This criterion helps regulate smaller stocks that may be more susceptible to price manipulation due to their lower market value. Moving such stocks to T2T aims to protect investors from potential manipulative practices.

How Frequently are Stocks Moved to T2T Segment?

The frequency of changes in the Trade-to-Trade (T2T) segment involves two main reviews: fortnightly and quarterly. 

• Fortnightly Review is used to identify securities moving into the T2T segment.

• Quarterly Review is used to identify securities moving out of the T2T segment.

These reviews apply to all securities, irrespective of their price bands. Additionally, to maintain stability, a ±5% price filter band is implemented for upward revision of Price bands.  Traders should be aware of these review cycles as they impact the trading conditions and volatility of stocks in the T2T segment.

Things to Remember While Trading in T2T Stocks

Some of the key factors to remember while trading in T2T stocks are mentioned hereunder.

Understanding Delivery-Based Trading

Trading in Trade-to-Trade (T2T) stocks requires a delivery-based approach. This means that traders must take their delivery when shares are bought and vice versa. Intraday trading or techniques like Buy Today Sell Tomorrow (BTST) are not permitted for T2T stocks, so traders need to plan their trades from a longer-term perspective.

Price Volatility and Liquidity

T2T stocks often exhibit higher price volatility due to factors like low liquidity and speculative trading. Using risk management techniques like limit orders or stop-loss orders is crucial to managing price risks effectively and having realistic profit targets.

Regulatory Compliance

T2T stocks are subject to stricter regulatory overviews due to their inclusion in this segment. Execution of sell orders of T2T stocks before completion of the settlement cycle will be refused. Traders should stay updated with exchange announcements, regulatory changes, and corporate developments related to T2T-listed companies. 

An Example of a T2T Trade

Let us understand the execution of a T2T trade with the following example. 

Consider a trader looking to buy 100 shares of T2T stock, XYZ Limited, priced at Rs. 150 per share. Since XYZ Limited belongs to the T2T segment stocks, the trader must pay the full purchase amount of Rs. 15,000 (100*150) without availing of any margin trading facility. 

The shares will be delivered according to the prevailing rolling settlement cycle, which is T+1 days. Afterwards, the shares will be credited to the trader’s demat account. 

No intraday trading is permitted for T2T stocks, so the trader cannot execute any sell order for these shares until delivery is completed. After delivery, if the shares trade at Rs. 180 per share, the trader can sell them and receive Rs. 18,000 (100*180) in their account. In this case, the profit arising from the buy and sell orders of the T2T stock is Rs. 3000 (18000-15000).

Conclusion

The T2T stocks segment includes stocks with high price volatility and was created to protect investor interests. These stocks' characteristic features include a restriction on intraday trading and compulsory delivery, making it essential for traders to have sufficient funds in their trading account before dealing with them. Failure to adhere to these SEBI and stock exchange rules can lead to an auction of shares or penalties for traders.