Behind The Scene When You Place A Short Trade In The Spot Market

Behind The Scene When You Place A Short Trade In The Spot Market

The stock exchange perspective of shorting in the spot market

Many exchanges will let you short on the spot market only for the day. Thus any short positions have to be closed before the trading day ends. Thus you can short the only intraday and not carry forward your shorting positions overnight.

You cannot carry forward the short trade overnight learn more about it here. However, when you buy the stocks you can keep it with you and sell many days later. To know why this happens first understand how the exchange sees short position.

What happens in the exchange?

When you short a position you sell first and buy later. The moment that you place a sell trade the exchange is alerted that you have sold a stock. The exchange, however, is unable to figure out whether the sale is a regular sale or a short sale. Thus it is like you owned a share and then you have sold it now. Thus you have to have the shares in your demat account to be able to sell it. The exchange knows that you have placed a sale of shares only after the market ends and not before that.

So you have shorted the stock and you are waiting for the price to decline to make some profits. The price of the stock does not decline and you think that you would wait for one more day for the price target to reach. But when you carry forward a short sale at the end of the day the exchange will think that you have sold shares so you need to have them for delivery. But you never have these shares in the first place. So you cannot deliver the shares as per the obligation. This means that you have defaulted and you end up paying a hefty amount for defaulting. This is a position which is known as short delivery.

Short delivery of stocks

When a short delivery happens the exchange will settle the case in the auction market. The trader is fined a penalty for defaulting on delivering the stocks. The price of penalty is very high indeed so make sure that you close off the short positions in a trading day itself.

The exchange checks the short sales or the selling trades placed after the end of the market. Thus you need to make sure that you cover off any of the short trades before the market closes. Thus square off any short positions that you have intraday.