India's pilot T+0 trading market has risen for 2 consecutive days, canceled for 30 years, when will A-shares resume?

Executive Summary:

The Indian stock market, which is among the long bulls, ushered in the settlement of optional T+0 transactions on March 28. Indian investors are both hopeful and bewildered about piloting T+0 trading. The trial of T+0 trading spurred the Indian stock market to rise for two consecutive days. It took India 23 years to go from T+5 to T+0 on a trial basis. It's been 30 years since we cancelled T+0, when will A-shares resume T+0 trading?

1. The Indian stock market in the midst of the long bull ushered in the optional T+0 transaction settlement.

India's Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE) announced on March 27 that starting from March 28, 25 large-cap stocks will be launched to complement the existing T+1 settlement cycle on a trial basis for T+0 trading, as reported by India's Business Online on March 27.

On Wednesday, BSE and NSE made a list of 25 common shares that can participate in T+0 trading, which will be traded and settled on the same day in T+0 and T+1 optional ways. Business Online commented that the stocks on the list are all large-cap stocks, including Ambuja Cements, Ashok Leyland, Bajaj Auto, Bank of Baroda, Cipla, Divi's Laboratories, Hindalco Industries, JSW Steel, LIC Housing Finance, LTIMindtree, MRF, Nestle India, SBI, and Vedanta.

India's two stock exchanges said in their announcements that T+0 same-day settlement will complement the existing T+1 settlement cycle and will be the predecessor of instant settlement. This means that T+0 trading may be selectively launched at the right time in the future.

The T+0 price will not be taken into account in the index calculation and settlement price calculation. According to the trading of the T+0 sector, there will be no separate closing price for the security.

Second, Indian investors are both hopeful and confused about the trial of T+0 trading.

On the day of the announcement of the trial of T+0 trading, India's S&P CNX NIFTY Index (NSEI) index opened 61 points higher and rose 96.2 points, or 0.44%, to close at 22,100.85 points. The next day, it continued to rise by 203.25 points to close at 22,326.9 points. The stock market rose for the second day in a row, indicating that investors in India are welcoming the trial of T+0 trading.

However, market participants are also confused as Reliance Industries, Infosys and Tata Consultancy, which have a larger market cap in India, do not appear on the list. In addition, the list includes individual illiquid stocks, such as MRF, which has a six-month average daily volume of 399 shares at BSE, as well as some particularly actively traded counters, such as Union Bank, with a six-month average daily volume of 1.94 million shares.

Investor confusion is also reflected in the fact that when the exchange released the list of stocks to be traded on a trial basis, it did not clarify the criteria for selecting these stocks or the name of the broker that would facilitate T+0 settlement.

According to Business Online, the transition from T+2 to T+1 settlement of Indian stock trading is also carried out in stages, but the stocks with the smallest market capitalization are piloted first. In this trial of T+0 settlement, the first choice is stocks with large market capitalization.

3. Why can the trial of T+0 trading stimulate the Indian stock market to rise for two consecutive days?

From T+1 to T+0, it means shortening the transaction settlement cycle, which will increase the cost of investors and expand the volatility of the stock market on the one hand. On the other hand, it can improve the time efficiency of investors and reduce the risk of investors' stock holdings. In addition, it will also help strengthen the risk management of the clearing house and the entire securities market ecosystem.

In the current T+1 system, sellers cannot continue trading on the day they buy stocks, and can only wait until they sell the next day, and can only complete a closed loop of transactions in two days, which is conducive to maintaining market stability. However, through the new T+0 settlement system, sellers will be able to sell on the same day of the transaction, and theoretically can obtain multiple closed transactions a day, which is conducive to promoting the activity of the trading market.

On top of that, T+0 will increase liquidity for investors, allowing them to quickly access other trades without losing investment opportunities due to waiting periods. In addition, same-day settlement will greatly reduce trading risk, providing immediate and tangible value to traders and investors.

Under the new rules of the two stock exchanges in India, the optional trading window for these 25 stocks will be available from 9:15 a.m. to 1:30 p.m., and all investors will be eligible to participate. T+1 surveillance measures also apply to stocks in the T+0 settlement cycle. The price range of the T+0 segment will be 100 basis points plus or minus from the price range of the regular T+1 market. This range will be recalibrated after every 50bp move in the underlying T+1 market.

Fourth, it took India 23 years from T+5 to T+0 on a trial basis.

Of course, the trading frequency of the Indian stock market has accelerated, and it has been slowly moving forward from T+5 to now trying out T+0.

The Securities and Exchange Board of India (SEBI) introduced T+5 (5 days from the date of trading) rolling settlement for certain stocks in July 2001 and then extended to all shares in phases.

T+5 gave way to T+3 in April 2002.

Since April 2003, the Indian stock market has replaced T+3 with T+2.

From January 2023, the trading cycle of the Indian stock market has been further shortened to T+1.

From March 28, 2023, T+0 transactions will be piloted.

In a notice last week, the Securities and Exchange Board of India (SEBI) said that "the significant evolution of MII's technology, architecture and capabilities provides an opportunity to further advance the clearing and settlement schedule." In addition, India's depository ecosystem is digitally visible for individual client-level holdings, thus enabling the immediate transfer of securities, and India's payments and settlement ecosystem has long allowed for real-time transfer of funds ».

5. It has been 30 years since T+0 was cancelled, when will T+0 trading resume in A-shares?

In fact, we have long implemented a more advanced T+0 trading system. In May 1992, the Shanghai Stock Exchange abolished the price limit and implemented the T+0 trading rule, and in November 1993, the Shenzhen Stock Exchange also implemented T+0.

However, in 1995, based on the so-called consideration of preventing stock market risks, the Shanghai and Shenzhen stock exchanges, A-shares and fund trading, were transferred from T+0 to the T+1 system. Going back has always been the biggest problem facing China's reform and opening up. Over the past 30 years, when will China's big A shares resume the implementation of T+0 has always been a question that many shareholders are most concerned about.

The regulator believes that the implementation of T+1 and the cancellation of T+0 are to limit speculation in the market.

However, many investors believe that if the T+1 system is abolished and there is no alternate-day limit, the deep hedge situation of retail investors will be greatly reduced, and they can promptly correct the mistake when they find a buying error.

Compared with T+1, the biggest advantage of T+0 is that it can increase the activity of the market, as long as you are willing, a fund can be repeated in the market several times in a trading day, which is equivalent to adding funds to the stock market in disguise and improving the liquidity of the market. This is also a good thing for the state and brokers, as stamp duty can be overcharged, and trading commissions will increase as a result.

Of course, there are certain risks associated with the implementation of the T+0 trading system. For example, it increases market volatility. Excessive speculation may be encouraged, and liquidation risk may also be increased.

But in general, investing is the art of investors making trade-offs between risk and return. We often say that investment is risky, and you need to be cautious when entering the market. It is inherently contrary to the nature of the market to limit it on the grounds of risk in a risky market.

How to respect the market, not to equate the identity of regulators with parents, distinguish the difference between investors and children, and reduce improper intervention and excessive intervention in the market should be a major issue that we need to be soberly aware of.

In any case, what does India dare to do, what are we afraid of?

[Author: Xu Sanlang]