You can now participate in auction markets

Encouraging greater participation in the auction markets and reducing the impact of auction penalties due to short delivery have been on our to-do for a long time. We have had situations where the losses have been up to 20% due to the lack of liquidity in auction markets. This is because there was no retail participation, and it was just proprietary brokers.

Starting now, if you hold stocks in your demat, you can participate in auctions where you can potentially sell your share at prices higher than the current market price. The auction market opens every day around 2 PM for 30 minutes. As participation increases, the gap between regular markets and auction markets should reduce, especially for mid-cap and small-cap stocks. This will help traders with short deliveries avoid large penalties.

Auction markets

If you have traded stocks for intraday or stock derivatives (F&O), chances are you would have faced a short delivery and an auction penalty. Let me explain with examples.

Say stock XYZ was trading at Rs 100, and you shorted 1000 shares, expecting the price to fall by the end of the day. You could buy it back and make an intraday profit if it did. Selling a stock without owning it is called a short sell. If you bought the stock before the end of the day, then you are not obligated to deliver the stock. But what if the stock hits an upper circuit of Rs 120 (20%)? It’s not possible to exit the position.

The upper and lower circuits are the maximum a particular stock can move in a day. The percentages can vary from 5% to 20%. Stocks in the derivatives segments (F&O) don’t have any circuit limits. At the upper circuit, there will be only buying orders at the circuit price, and transactions happen only if someone places a sell order at that price. Usually, the transactions stop as sellers are unwilling to sell the stock, given the buying interest at the circuit price and a high chance of the stock moving further up the next day. It is exactly the opposite if a stock hits a lower circuit; there will be only selling orders and no one buying.

This is how the market depth of a stock will look at the upper circuit.

Going back to our example, now that the stock is at Rs 120 with no sellers, you can’t buy back the stock before the end of the day. This means you have to deliver the shares you sold to the exchange the next trading day. If you don’t deliver the shares, the exchange will buy 1000 shares that were short-delivered in the auction markets on T+1 day and deliver them to the buyer on T+2.

Assume that on T+1 day, the current market price of stock XYZ is Rs 121. Depending on the stock’s liquidity, the auction market price could be as much as 20% away from the current price. 20% in our example could mean the stock in the auction market will be trading at Rs 145. If you bought the stock in the auction, you would lose up to Rs 24,000 (Rs 145- Rs 121 x 1000) due to auction impact cost or auction penalty. The Rs 24,000 is a risk-free profit for the seller in the auction market.

Short delivery can also happen if you hold a stock F&O position at market close on the expiry day. If you are holding a sell future, buy in the money put option, or short in the money call options at the close of expiry, you have to deliver the quantity of the underlying stock to the exchange on the next trading day. As explained above, failure to deliver stocks will lead to an auction and a potential penalty.

The ~200 stocks trading in the derivatives segment are liquid mid to large-cap stocks; hence, the auction market for them also tends to be pretty liquid. The impact cost of the auction is usually relatively small.

In India, only index derivatives are cash-settled; all stock derivatives are settled through physical delivery.

You can also get into a short delivery situation in an equity BTST (Buy today, sell tomorrow) trade, that is, if you have sold the stock before the stock has been credited to your demat account. If the seller fails to deliver to you for whatever reason, you also end up short delivering.

We believe that by making the auction market accessible to retail investors, it will improve liquidity, making it more efficient. While customers willing to sell a stock in an auction can demand a higher price and generate profit by selling at higher than current market prices, the increased participation should reduce the spreads and help traders stuck in short delivery positions.

How to participate in auction markets?

1. Every day between 12 PM to 2 PM, exchanges publish a file which will have quantities of all stocks that will be bought in the auction markets on that day. We update that here: https://zerodha.com/auction.
   Building a utility to alert customers about specific stocks is on our to-do, but will take us some time.
2. In the orders section on Kite, you can see the Auction menu.
3. When the auction markets open at 2 PM, you will see all the stocks in your holdings, including the eligible quantity that you can offer in the auction markets on that day.
4. You can click on the sell button to see the market depth of the auction market and the price at which the other offers are made to sell. You can then place a sell order at the price that you want.
   
5. All auction orders are collected until 2.30 PM. Based on the best price available, the auction orders are then filled at around 2.30 PM.
6. If your sell order is filled, you will, just like in the normal market, receive 80% of the sale proceeds that will be available for trading immediately. You will receive the full funds like in the normal market on the next day. The sell credit from auctions will be a separate entry on the ledger, and a separate contract note for the auction trade will be emailed.

Common queries

Can you buy stocks in the normal session and sell in the auction market?

No. Since the auction session is conducted to settle the buyer who was short-delivered, you will only be able to sell stocks already lying in your demat account. Stocks purchased on the same day or one day earlier will take T+1 days to be settled in your account.

What happens when you sell stocks in an auction and then buy back in the normal market?

Stocks sold will get debited from the Demat account by the end of the auction date. Stocks purchased will be credited on the next trading day.

Aren’t auctions conducted on T+2 days, and stocks settled on T+3?

Over the last year, the Indian capital markets have been moving from T+2 to T+1 equity settlement cycle. Until we were in the T+2 settlement cycle, an auction was conducted on T+2 days for short-delivered quantities and then settled on T+3 days. But now that we are in a T+1 settlement cycle, the auction will be conducted on T+1 and then settled on T+2.

Can auction orders be modified?

No, auction orders cannot be modified. However, you can cancel and place a fresh order with a modified price or quantity during the auction session.

Can I cancel my pending or partially filled auction orders after the auction session ends?

Pending and partially filled orders cannot be cancelled after the auction session ends. The exchange will automatically cancel them at around 4:30 PM. Also, if you participate in the auction and the order is pending or partially filled, the shares cannot be sold in the normal market for the day. Please keep this in mind if you plan to sell your unfilled shares in the normal market on the same day. Make sure to cancel pending orders before the end of the auction session if you wish to also place a selling order for the same stock in the normal market.

What happens if the shares sold on the auction are short-delivered for any reason?

Suppose the auction seller fails to deliver by T+1. In that case, the trade shall be closed out at the highest price prevailing across the exchanges from the day the trade was executed to the auction day, or 20% higher than the settlement price on the auction day, whichever is higher.

Are there any additional charges for selling in the auction market?

No, we will treat this as any other equity delivery sale trade for which the brokerage is zero (we charge a token of Rs 0.01, irrespective of the value of the order for equity delivery trades). Other charges, such as exchange transaction charges, stamp duty, DP charges, and STT, will apply as usual.

At what price can I place an order?

You can look at the market depth of the auction symbol, as explained in Step 3 in the section above, and place an order by checking the current price in the normal market. The circuit limits in the auction market are set at 20% of the previous day’s closing price.

When are auction markets most active?

Typically, many stocks hit their upper circuit on extremely bullish days. Also, on the T+3 day after the monthly expiry of stock derivative contracts or the last Thursday of the month. But from Feb 2023, the auction for short-delivered quantities on expiry of stock derivatives will also happen on T+1 day after expiry.

Are the auction market timings fixed?

While the auction market typically starts at 2 PM and remains open for 30 minutes, sometimes the opening can be delayed by up to 45 minutes. There are also rare instances when the auction market can be cancelled completely on a given day.

We hope that you will participate in the auction markets, not just to benefit if there is any opportunity to generate risk-free profits, but also to help improve the efficiency of the auction markets by reducing the impact costs.