Secondary Markets: Exchanges, Trading, Clearing and Settlement
Scope
Secondary-market questions test how orders become trades and how trades become settled obligations. You need the exchange, broker, clearing corporation, clearing member and depository roles, plus the settlement cycle.
Core rules
- Trading on recognised exchanges is screen-based and anonymous. Orders match by price, then time. Exchanges set circuit filters, price bands and call-auction mechanisms for illiquid or special situations.
- A clearing corporation novates trades, becomes the counterparty, nets obligations and manages risk through margins and a Settlement Guarantee Fund. It does not take market views.
- Settlement is delivery-versus-payment: funds and securities move through clearing members, custodians, depositories and banks. Indian equity cash-market settlement is T+1; SEBI has also permitted optional T+0 settlement for a limited set of securities.
- Brokers must segregate client funds and securities, report margin, and follow know-your-client norms. Short selling, block deals and bulk deals have separate disclosure rules.
Worked example
An investor buys 200 shares at ₹400. Trade value = ₹80,000. With brokerage of 0.1% (₹80) and STT of 0.1% on delivery (₹80), the funds payable before other charges are ₹80,160. On T+1, the clearing corporation computes the member’s net obligation; the investor’s broker pays funds, the seller’s broker delivers securities, and the depository moves shares to the buyer’s demat account. If the seller defaults, the clearing corporation’s risk fund supports settlement.
Traps
The stock exchange is not the settlement counterparty after novation. Do not confuse pay-in with pay-out. Do not apply derivatives lot sizes to equity cash-market trades. Do not treat T+1 as a guarantee that the investor receives money or shares directly from the exchange.