Stock Markets

What is Short Delivery & How it works

short delivery

What is a Short Delivery?

When one takes an intraday position in the equity segment, whether buy or sell, the position has to be squared off on the same day. Imagine if the position couldn’t be squared off due to some reasons, how it will affect the settlement:
Scenario 1 – If you buy stocks and couldn’t square off then the intraday position will be converted to delivery and you’ll be asked to offset it on the next day, also known as BTST (Buy Today Sell Tomorrow).

Scenario 2 – If you sell stocks (without holding in your demat account) and couldn’t square off on the same day, resulting you’d default to deliver the shares on the prescribed settlement day (T+2). This default is called “Short Delivery”.

Ideally, an equity delivery based trading in India operates in a T+2 i.e. two days after the transaction day, rolling settlement cycle. It simply means that if you buy shares on say, Monday (T day) you receive the delivery on Wednesday (T+2 day). Similarly, when you sell the shares on Monday, you are obliged to deliver the shares on Wednesday. Note that you can withdraw funds only on the settlement day and not on the transaction day.
Let’s take a scenario, assume you have sold 100 shares of Infosys on Monday, 3 January 2016 at Rs. 900 (T day). On Wednesday (T+2), 5 January, you will receive the sale proceed worth Rs. 90,000 (100*900) and your demat account will be debited with 100 shares. However, there’s a twist in the story.

Imagine you don’t have 100 shares of Infosys in your demat account but you still sold them?
No matter what, you have to make delivery of the shares on the prescribed settlement day (T+2) which you have sold on the transaction day (T day). However sometimes it may happen that you take a short position without owning shares in your demat account hence you would not be able to make delivery of the stocks on T+2 and would end up defaulting, resulting a Short Delivery. Now the question here is why do people sell a stock and not deliver it? This happens due to various reasons:

Example 1 – You sold (shorted) 100 shares of Infosys for intraday expecting the price of Infosys to decrease. Note that whenever you sell in intraday position you are required to buy it back (square off) to offset your position. Assume you forgot to square off your position or the square off didn’t happen for whatsoever reason; with this short delivery, you are left with no choice but to deliver 100 shares of Infosys on T+2 days. Since you don’t have any shares in your demat account you would not be able deliver and subsequently default, thereby causing a Short Delivery. However, you’ve got nothing to worry with us! Since Fyers offers you two products to buy/sell in equities namely INTRADAY and CNC.

INTRADAY: This code used for intraday positions. If you choose this product code while entering the trade, then you do not need to worry because it automatically squares off all your intraday positions at 3:20 pm even if you forget to square off intraday positions yourself. We recommend that you close the positions in order to maintain control over your positions. However, in case you don’t, your intraday position will be squared off by us at the broker level.

CNC (DELIVERY): This product type is used for delivery positions in equities. If you select this code then it will ensure that you hold a sufficient quantity of stocks before selling it.

Example 2 – You were bearish on Suzlon Energy stock assuming the prices will tumble and you shorted it at a price of ₹17 per share. However, in turn the stock exceptionally rallies causing stock price to hit the upper circuit at ₹20. Whenever a stock hits the upper circuit there are no sellers in the market, hence if you’ve short sold the stock you cannot buy it back until it releases from the circuit. This usually happens with a lot of illiquid stocks.

Now imagine the stock is never released during the day! Needless to say, you’d have to hold your short position until you find a buyer, which subsequently results into a Short Delivery. Point to note: Stocks which have derivative contracts do not have circuit filters.

WHO CONTROLS THE SITUATION?

It is the Exchange who ensures that the buyer (person who has a buy position) will receive the delivery from the seller (person who has a sell or short position) in the prescribed settlement period (T+2). In case of failure (short delivery as mentioned earlier) the Exchange conducts an Online Auction to buy stocks on behalf of the buyer. Therefore in such cases the long receives the delivery after three days from the transaction day i.e. on T+3 instead of T+2.

HOW AN AUCTION TAKES PLACE?

The auction is conducted by Exchanges every day between 2:00 PM and 2:45 PM. Only member brokers of the exchange can participate and sell shares which are short delivered. To avoid any conflict of interest the exchange doesn’t allow members whose client has defaulted (short delivered) to take part in auction. Let’s examine the auction process:

1. Auction Price Determination – The Exchange fixes a price range within which the participants offer to sell their shares. The upper limit of the range is set at 20% higher than the price that it closed on the previous day of the Auction whereas the lower limit of the range is set at 20% lower than the price that it closed on the previous day of the Auction. So in the above example, the price range of Suzlon Energy would be fixed at ₹14 – ₹21 (assuming Suzlon Energy closed at ₹17.5 the next day) where the fresh sellers can offer to sell their shares.

2. Auction Penalty – The exchange has to buy stocks which are short in delivery at whatever price offered by the fresh sellers. This may cause an extra payment to acquire the shares which subsequently has to be borne by the person who defaults in making the delivery. Moreover, the exchange also penalizes the defaulter by levying 0.05% of the value of the stock per day.

Auction penalty = Excess payment to buy stock + 0.05% of the total transaction value per day.

3. Final Settlement Process:
• The final settlement of the shares is made to the original buyer on the 3rd day from the transaction i.e. on T+3.
• On T+2, the exchange accepts pay-in of securities made by members through depositories and identifies the shortages. The members (usually brokers) are debited by an amount equivalent to the securities not delivered and valued at a valuation price which is known as “Valuation Debit”.
• On T+2, the exchange conducts the auction and purchases the stock from the auction participants on behalf of the defaulting seller.
• On T+3, the exchange gives the shares to the buyer and sends an Auction note to the defaulting broker. The broker then passes on such auction charge to the defaulting client.

How the final settlement is made by the Exchange when there are no sellers in the auction market:

In such cases, the Exchange opts for a cash settlement instead of delivery settlement and makes the payment in cash to the original buyer. Usually, this happens on the basis of close Out rate of the short delivered stock. Close out rate is the highest price of the stock from when you sell to the auction day or 20%, whichever is higher.

Be wary of shorting bullish stocks which can hit upper circuits. Successive upper circuits are a nightmare for short-sellers. Learn more about the price band of stocks on NSE website. Do feel free to ask questions or seek clarifications in the comments section below.

Tejas Khoday

Tejas Khoday

Tejas is the Co-Founder & CEO at FYERS, the youngest team to get NSE’s broker license. He has a specialization in finance and has over 10 years of work experience spanning across proprietary trading, risk management, and broking. Tejas & his team started FYERS, a technology-focused brokerage as a mission to transform the trading/investment landscape in India.

32 Comments

  • Avatar Raju Menon says:

    I once got into this issue but thankfully got out of it. It is really risky to short penny stocks because they don’t have an adequate liquidity.

  • Avatar Babu Tiwari says:

    What if I buyback the position in the extended market hours which starts after 3.30 will it be considered as a short delivery?

  • Avatar Kushagra Panwar says:

    20 Billion Dollar Short on European Market by Bridgewater.
    Kindly enlighten with the concept of Short Sell in International Market.

  • Avatar Markson says:

    Hi, my question is:

    If a traders short sells, say 100 shares (Rs. 500/- per Share), on Monday for Intraday, but could not square off, since there are no sellers on the same day, these will be converted to delivery. Now on Wednesday, trader has to deliver the shares to buyer. But trader is short, can he buy (as Intraday? or delivery?) on Wednesday and deliver the shares to original buyer who bought on Monday?

    Markson

    • Tejas Khoday Tejas Khoday says:

      Hey I have mentioned it in the post itself. In such cases, an auction will be conducted where you will have to buy shares and pay penalties. I am copy-pasting content from the above post for your reference: In case of failure (short delivery as mentioned earlier) the Exchange conducts an Online Auction to buy stocks on behalf of the buyer. Therefore in such cases the long receives the delivery after three days from the transaction day i.e. on T+3 instead of T+2.

      HOW AN AUCTION TAKES PLACE?

      The auction is conducted by Exchanges every day between 2:00 PM and 2:45 PM. Only member brokers of the exchange can participate and sell shares which are short delivered. To avoid any conflict of interest the exchange doesn’t allow members whose client has defaulted (short delivered) to take part in auction. Let’s examine the auction process:

      1. Auction Price Determination – The Exchange fixes a price range within which the participants offer to sell their shares. The upper limit of the range is set at 20% higher than the price that it closed on the previous day of the Auction whereas the lower limit of the range is set at 20% lower than the price that it closed on the previous day of the Auction. So in the above example, the price range of Suzlon Energy would be fixed at ₹14 – ₹21 (assuming Suzlon Energy closed at ₹17.5 the next day) where the fresh sellers can offer to sell their shares.

      2. Auction Penalty – The exchange has to buy stocks which are short in delivery at whatever price offered by the fresh sellers. This may cause an extra payment to acquire the shares which subsequently has to be borne by the person who defaults in making the delivery. Moreover, the exchange also penalizes the defaulter by levying 0.05% of the value of the stock per day.

      Auction penalty = Excess payment to buy stock + 0.05% of the total transaction value per day.

  • Avatar Sagar says:

    When I initially tried to sell the stock when price was going down my order got rejected.
    Does Fyers not supporting short selling?

    • Tejas Khoday Tejas Khoday says:

      Sagar, An order rejection can happen for multiple reasons like lack of margins in your account, wrong order placement, if it in banned scrips etc. If you have such doubts, please get in touch on support@fyers.in or call us on 080-46251111.

  • Avatar Giri says:

    Dear Tejas,
    Are all shares eligible for short-selling with you?
    what is the margin provided for intraday and delivery?

    • Tejas Khoday Tejas Khoday says:

      Hello Giri, you can short all those shares which are in EQ series are available to short. We provide upto 15 times leverage for A category stocks. We don’t provide delivery margins as of now.

  • Avatar Anand says:

    My question to you is how much your trading platform will take to execute intraday orders and how you differentiate your trading platform with others?

    • Tejas Khoday Tejas Khoday says:

      Hello Anand,

      1. Our trading platform is free.
      2. Brokerage charges are ₹20/- per executed order. Click here for more info.
      3. It is free to open an account.

      Our strength is technology! So far, we have robust platforms which are also power packed with features. Going forward that will continue to get much better. Also, we love stockbroking so you’ll be in good hands.

  • Avatar Vaibhav says:

    Agreed with vasu.. Useful information but could have made it little shorter.

  • Avatar Hitesh says:

    Whacky pic for short delivery!

  • Avatar Harshit Trader says:

    Saw your email about brokerage reduction to 20 rupees. Now you will get more clients.

  • Avatar OmPrakash says:

    Please call me. I am interested in opening an account with you. Your sales person had called but I didn’t open before.. Now I feel I want to shift from Zerodha due to their platform failure again and again. I am losing money frequently. I have left details in ur account opening link.

  • Avatar Ganapathi says:

    Sir, I very much appreciate that you have reduced your brokerage before GST. I am very happy with FYERS and will refer many friends to trade with you instead of Zerodha.

  • Avatar ketaki says:

    I had earlier asked (can’t see my original post now!)
    1. In scenario 1, what if I buy the stock and can not sell it even next day (after it is converted into BTST) because there are no buyers in the market?
    2. If I am taking a buy position in market, and even though I’ll get the delivery only after T+2, why am I expected to square off the position the same day?

    • Avatar Sanjana says:

      Scenario 1: If you buy a stock for Intraday, at the time of square off. If there are no buyers, it means that you can’t sell. You’d be forced to take delivery of shares to your demat account.

      Secondly: If you are doing Intraday, you suppose to close the trade on the same day.Even if you do not sell the stocks by yourself, they will automatically square off before closing of the Market.

      If you want to carry forward the trade for the next day then you should buy with product code CNC

  • Avatar ketaki says:

    Can’t see the question that I’d posted in the morning!! why so??

  • Avatar ketaki says:

    Hi,
    Thank you so much for the lucid explanation. Had few doubts though, request your help with them.
    1. In case of scenario 1, if I buy today and am not able to sell (square off) because there are no buyers in the market today or tomorrow(BTST), what happens in that case?
    2. If I am buying, since I’ll only get the delivery on T+2 day, why am I expected to square off on the same day that I buy?

  • Avatar Madan says:

    thanks this was useful blog

  • Avatar venkat says:

    Thank you for this info.

  • Avatar A K GUPTA says:

    Is it possible to carry forward intra day positions next day?

    • Tejas Khoday Tejas Khoday says:

      You’ll have to convert them to delivery to carry them forward to the next day. Otherwise, they will be squared off between 3.20 PM to 3:30 PM by default.

      • Where to get Intraday mutual fund trading ideas

      • Tejas Khoday Tejas Khoday says:

        Hey Shaju, just saw your comment as I was away for the long weekend. Mutual funds are not intraday trading instruments. The price of NAV does not fluctuate intraday. NAV is updated at the end of each day and hence it is not a feasible idea to begin with. If you want to trade intraday then I suggest:
        1. Nifty futures & options.
        2. Equity intraday, futures & options.

        You can use the screeners on Fyers One and Fyers markets (mobile app) to get ideas.

      • Tejas Khoday Tejas Khoday says:

        Shaju, mutual funds are not intraday trading products man. They’re only meant for long-term investments.

  • Avatar Sharadha says:

    Hi sir,
    You’ve given very good examples its easy to understand

  • Avatar Lakshmi says:

    What if there are no buyers for the shares which went to the auction?

  • Avatar Smith says:

    New topic with simple words.
    Very useful for every trader

  • Avatar Syed says:

    Had few doubts on this short delivery, now cleared by this blog.
    Thanks

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