I sold the stock on monday for intraday with price of Rs.105 and stock hit the upper circuit so after T+3 days auction settlement price is Rs.100. Do I get the difference amount to my trading account? If not why?
If you short sell shares in Intraday and not able to close your position in Normal market, then your position is closed in the Auction market.
Yes you will receive the difference amount to your trading account. You can be profitable on Auction trade if stock falls rapidly on T+2 day.
Close out will be at the highest price prevailing in the exchange from the day of trading till the auction day or 20% above the official closing price on the auction day, whichever is higher.
In case if that auction price is less then your sell price you are profitable on that trade.
Yes, you can make profits in the Auction market, but the chances of this are very rare.
Remember that whenever you are selling shares, there is a buyer. When you sell shares and aren't able to deliver these shares, the buyer doesn't get the shares for which he has paid money. In such a case, the Exchange calls for an Auction where someone else comes and delivers these shares to the buyer. The Exchange levies a penalty on the short delivering broker.
Let's understand this through a practical example.
On Monday, Chandu sells 1 share of Reliance Industries [Assume you are trading with Zerodha] @ Rs.1080
On T+2 (Wednesday), you are required to deliver these shares to the Exchange. Let's assume you default in delivery
On T+2, the Exchange notices that these shares have not been delivered by Zerodha and hence blocks a sum of money from Zerodha's account. This amount which the Exchange blocks is called the "Valuation Debit". The Valuation debit amount is the closing price of the Stock, one day before the Auction takes place [i.e Closing price of Reliance on Tuesday [T+1] because Auction takes place on T+2 i.e Wednesday]. Assume closing price of Reliance on T+1 is Rs.1090, the Exchange blocks Rs.1090 from Zerodha's account.
On T+2, the exchange conducts an Auction and purchases the stock from the Auction participants on behalf of the defaulting seller.
On T+3, the Exchange gives these shares to the original buyer of the shares and debits Zerodha's account with "the higher of the Valuation debit or the price at which the stock has been bought back in the Auction market". Assume in the Auction market, the price at which it gets bought at is Rs.1110, then the Exchange blocks an additional Rs.20 [Auction Purchase value of 1110-Valuation Debit of 1090]. Assuming in the Auction market, the stock was purchased at Rs.930 [Assuming Reliance fell quiet a bit], now the Exchange will continue to block 1090 from Zerodha's account and the difference between how much the Exchange has blocked (1090) and the price at which it is purchased (930) which is Rs.160 is transferred to the Investor Protection Fund.
Can you as a client profit through an Auction? Yes !
Assume that the closing price of Reliance on T+1 was 1040 [This is the Valuation Debit] and assume in the Auction market the Exchange buys back the shares at Rs.1060, Now the Exchange will eventually debit Rs.1060 from Zerodha's account and the difference of Rs.20 (Rs.1080 price at which you sold - Rs.1060 price at which it was bought back in the Auction market) is your profit.
Shiva, can you explain with an example please
Thank you mate. I was looking for this only !
How auction settlement penalty is calculated? Can you please with taking X share of ₹ 100 as short delivery?
This post explains everything related to short delivery in detail:
Can you please explain us how auction penalty is calculated with the help with help of example, I am little bit confused?
Thanks in advance
In the auction market, the exchange will specify a range within which auction participants can offer to sell their shares. The range is +20% and -20% from the previous days closing price.
If you sold your shares at 100 and next day the stock closed at 105. Then the auction market selling price can go upto 126. This is the upper cap for auction sellers.
If you have sold 1000 shares at 100, then your max auction penalty will be Rs.26,000. [(126-100) * 1000].
It’s little tricky to understand, but the post shared above, explains everything in detail.