Trade to Trade (T2T) Stocks: Meaning, Rules & Impact

The equity market (also known as the stock market) has several segments that are controlled by the SEBI such as rolling settlement, institutional segment, qualified foreign investor segment, etc. One of these many unique segments is Trade to Trade Segment. 

Before we get into the subject of what makes the Trade to Trade segment so unique, let’s dive in and understand what it is and why it was introduced.

What is Trade to Trade Stock Segment?

Trade to Trade (T2T) is a stock segment where shares are traded only on a delivery basis which means that the delivery of the stock cannot be taken on the same day. T2T stocks are not eligible for intraday trading. Intraday trading is buying and selling stocks within the trading hours of the same day.

Why Stocks Are Shifted to the Trade-to-Trade Segment

Indian exchanges usually move stocks to the T2T (trade-to-trade) category to curb excessive speculation and price manipulation. Here’s looking at some of the key reasons behind the same - 

• Surveillance Measures: T2T is often a preventive measure implemented by the BSE and the NSE after consultation with SEBI (the Securities and Exchange Board of India). 
• Volatility in Price Movements: Stocks with unexplained or frequent price movements or shocks are usually added to this list to calm the market. 
• Combating Excessive Speculation: With 100% delivery required, it prevents speculators from taking on large intraday and short-term positions that are not reflective of the company's fundamentals. 
• Quality Checks: These are often used when companies encounter poor governance, audit issues or when a firm is deemed risky.

Criterions for Shifting the Shares in the Trade to Trade Stock Segment (T2T)

P/E of the Stock

One of the main criteria for shifting the shares in the Trade to Trade Stock Segment is P/E over-valuation. For example, in BSE, if the Sensex P/E is within 15-20 and if the stock has a P/E of more than 30, the stock may be considered for moving to T2T. 

The Earnings per share (EPS) considered for computing the P/E will be the following EPS of the last four quarters. 

Price Variation

The second one is the price variation. Let us assume the value of the stock is almost 25% more than the Sensex or the specific sectoral record to which it is benchmarked. In this case, the stock may be considered for moving to T2T. The value should not vary a lot when compared to the benchmark index (Sensex or Nifty) 

Market Cap

The third criterion is the market capitalisation of the stock. If the market cap falls below Rs.500 crore, it will be considered for moving to the T2T segment. The idea here is to control hypotheses in stocks that could be powerless against value control because of their small size. Initial public offerings are typically barred from these T2T rules.

How Frequently Are Stocks Moved to T2T Segment?

Moving of shares to the T2T segment is regularly done on a fortnightly basis. Every quarter, the trade chooses to move to and from the T2T segment. 

Whenever a stock is moved to the T2T segment, the price filter bands are fixed in the scope of ±5% for at least 22 trading days. This guarantees stability in these stocks. If it does not match the criteria, it cannot be moved to the ‘T2T’ segment.

How To Identify T2T Stocks

Here’s how you can identify T2T (trade-to-trade) stocks today: 

• Check the Scrip Names (BSE/NSE): The best method is to look for the Book Entry (BE) suffix on the National Stock Exchange (NSE) or the T on the Bombay Stock Exchange (BSE) next to the stock name. 
• Warnings on Brokerage Platforms: Trading platforms and apps specifically mark these stocks, often preventing any intraday orders before you place the same. 
• Exchange Circulars/Releases: Both the BSE and NSE websites often publish periodic circulars (every quarter or monthly) that announce stocks moved to the T2T category. 
• Watch Out for the T-Segment Categories: Look for daily updates under the BE or T segments on financial news platforms/sites. 

Some of the main criteria for identifying T2T stocks include the following: 

• High volatility in prices: Stocks that display abnormal movements in prices, particularly where the fortnightly fluctuations surpass the Nifty 500 or even the sectoral index by 25% or higher. 
• Overvaluation: A higher P/E (price-to-earnings) ratio in comparison to the Nifty or Sensex, thereby signalling speculative overvaluation. 
• Lower Market Cap: Entities with a market capitalisation of less than ₹500 crore are usually listed for surveillance, often resulting in a shift to the T2T category. 

Note that all T2T stock purchases must be paid in full and delivered to your demat account. No intraday trading (buying and selling on the same day) is permitted. If you purchase them today, you may only sell them on the next working day after they are credited to your account. You cannot sell shares in a BTST (Buy Today, Sell Tomorrow) transaction until they are delivered to the account.

How to Trade in the T2T Segment? 

You can trade in the T2T segment by following the steps that are mentioned below-

• If you are looking to buy shares, you need to pay the full amount and take the trade on delivery.
  
• Take note that while selling the shares it is important to check that you already have delivery in your Demat account as without this you will not be able to sell shares.
  
• Once the shares are sold, no netting off or intraday is allowed in this segment. Therefore, it is very important to ensure that the investor has delivery in their Demat account and can give it on T+1 date (which is Trade day+1 day). Without T+1, the shares will go directly into the auction and result in heavy losses of investors apart from the penalization of the broker.
  
• In this segment, payment of amount and delivery of shares is mandatory and each trade has to result in delivery at the end. There is no scope for covering the position of investor nor Buy Today and Sell Tomorrow (BTST) or Sell Today and Buy Tomorrow (STBT).

How Trade-to-Trade (T2T) Stocks Work in Practice

Trade-to-Trade (T2T) stocks in the Indian market (BSE/NSE) are securities that are settled only on a compulsory delivery basis. Here’s what it means: 

• No Speculation or Intraday: You cannot purchase and sell the same T2T (trade-to-trade) stock on the same day. 
• Compulsory Delivery: If you purchase, you should have sufficient funds available, and the shares will be credited to your demat account (T+2). 
• Delayed Selling: Once you purchase, you may sell the shares only after they are credited to your demat account. This is usually two working days later. 
• Stocks in T2T: Note that exchanges may shift stocks to T2T to reduce volatility and speculation, as well as unusual price manipulations or low market capitalisation (usually less than ₹500 crore). 
• Identification Aspects: These stocks often appear in the XT or T group on stock exchanges, and brokers often mark them with a specific tag. 

Trading in these stocks means that you should have 100% of the available funds to purchase shares. Choose the Delivery option when placing your order, as the Intraday or MIS (Margin Intraday Square-Off) options will not work. The shares will be credited to your demat account in T+2 days, and you may sell them once they arrive.

Example of Dealing in T2T

In a standard scenario of the stock market, let us assume a trader purchases 5000 shares of Yes Bank at Rs 19 and sells them on the same day at Rs 20 each. Here, the trader has gained a profit of Rs. 5000 based on Intraday trading. 

On the other hand, if Yes Bank was in the ‘T2T’ Segment, the trader will firstly pay the sum of Rs 95,000 to the broker to get the delivery and after that, he cannot sell it until he gets the delivery of shares in his Demat account. He can sell those shares only after he gets the delivery.

How the T2T Segment Changes Trading for Investors

When a stock moves to the T2T (trade-to-trade) category, here’s what changes for the trader - 

• No Intraday/No MIS: You cannot purchase and sell T2T stocks on the same day. The system will naturally limit this. 
• No STBT/BTST: It is not possible to use Sell Today Buy Tomorrow (STBT) or Buy Today Sell Tomorrow (BTST) blueprints. 
• Settlement Timeframes: Shares are usually credited to demat accounts within 1 or 2 working days (T+1/T+2). 
• Full Utilisation of Capital: Since intraday leverage is not permitted, you should have the entire value of the shares to initiate purchases. 
• Lower Leverage: MTF (margin trading facilities) are usually unavailable for T2T stocks. 

Note that if you sell a T2T stock without getting the delivery in your demat account, the shares will be placed in auction. This will lead to considerable financial losses and penalties. T2T stocks often have lower trading volumes and wider bid-ask spreads, making them difficult to buy or sell quickly.

Understanding Liquidity and Volatility Risks in T2T Stocks

Here are some of the key risks that you should keep in mind - 

Inability to Net Off: 

• Compulsory delivery: If you purchase T2T shares on Monday, they will be credited to your demat account no earlier than Tuesday or Wednesday. You cannot sell them before they are credited to the account. 
• No STBT/BTST: Buy Today, Sell Tomorrow or Sell Today, Buy Tomorrow are both not allowed. If you sell, you should have the shares in your demat account; otherwise, the trade will go to an auction. 
• Intraday penalties: Attempting intraday trading on T2T stocks may result in stringent financial penalties and other penalties for accidental short delivery. This is because the exchange will treat the buy and sell portions as non-netted and separate transactions. 

High Volatility:

• Reduced participation: Since intraday speculative traders are not allowed, the buyer and seller pool automatically gets reduced. 
• Swings in prices: Lower participation naturally leads to erratic and volatile price movements. 
• Financial stress: T2T stocks are often shifted to this segment when companies are experiencing financial difficulties or exhibiting unusual price behaviour. 

Low Liquidity:

• Difficult Exits: Due to the compulsory delivery requirements, fewer people trade in these stocks. This leads to lower trading volumes and makes exits really hard. 
• Wider Bid-Ask Spreads: A lack of market makers may lead to wider bid-ask spreads. This makes it hard to exit positions at your preferred prices. 

Additional Risks:

• Locked-In Capital: Capital cannot be churned on the same day itself. The money to buy the stocks remains locked in for 1-2 days. 
• Risks at Auctions: If you sell a T2T stock and do not deliver the shares, the exchange will auction them to fulfil its commitments. You will have to bear hefty penalties as a result. 
• Higher Costs of Transactions: With every trade being a delivery trade, you will have to pay higher statutory and brokerage charges than intraday trades.

Settlement and Delivery Implications in T2T Stocks

T2T stocks are scrips that are shifted to a special category by the NSE or BSE, where every trade must result in compulsory delivery. It is a system tailored to combat price manipulation and excessive speculation. Here are some key aspects worth noting. 

• No intraday trading (positions cannot be squared off on the same day, and BTST is also prohibited). 
• You should have 100% of the funds available to purchase T2T stocks, with margin funding usually not permitted. 
• Every buy or sell order results in a direct transfer of ownership (actual delivery). 
• T2T stocks usually adhere to the T+1 or T+2 settlement cycle. This means that shares will arrive in/leave your demat account within 1-2 business days. 
• To sell T2T stocks, you should have the shares in your demat account before initiating the sell order. 
• If you sell a T2T stock and do not deliver the shares on the settlement day, it will be put up for auction, triggering hefty penalties and financial losses. 

Restrictions and Operational Risks

The restrictions on T2T stocks include the following - 

• No intraday trading: Intraday squaring-off is not allowed. Any trade initiated has to end in delivery. 
• Fixed circuit limits: Stocks in the T2T segment often come with stringent price filters. 
• Segment designation: On the NSE, these are usually under the Book Entry or T series categories. On the BSE, they are in the Z or T groups. 
• Zero margin trading: You cannot use these stocks for MTF (margin trading facility), meaning you cannot borrow funds or shares to trade. 

The operational risks include the following - 

• Liquidity Risks: T2T stocks often have lower volumes due to lower speculation. It is thus hard to exit positions quickly (harder to find sellers or buyers0. 
• Higher Volatility: While the core goal is to reduce speculation, T2T stocks may still be highly volatile due to various trading restrictions. 
• Auction Penalties: If a seller fails to deliver shares, the shares will be put up for auction, resulting in significant financial penalties. 
• Blocked Funds: The capital remains blocked until T+2 settlement. This lowers overall capital efficiency for traders and investors. 

Understanding Price Bands and Market Surveillance

Here are some of the main aspects that you should keep in mind: 

• 5% price filter: When a stock is shifted to the T2T category, price filter bands are sometimes fixed at 5% for a minimum of 22 trading days. This measure is aimed at lowering volatility. 
• Surveillance measures: Stocks are shifted to the T2T segment if they exhibit greater price volatility (above the Sensex or Nifty). They may also be moved if there is a high P/E (price-to-earnings) ratio or if the market capitalisation is less than ₹500 crore. 
• Surveillance actions: These moves are reviewed every fortnight by SEBI and the exchanges (for entry) and also quarterly (for exit). This is done to safeguard retail investors. 

Checklist Before Buying a T2T Stock

Now, the important thing to remember is to have an actionable checklist before buying a T2T stock. This is what it should ideally contain: 

• Compulsory Delivery & Zero Intraday: You cannot sell these shares on the same day. They should settle in your demat account first (T+1 or T+2). 
• Lower Liquidity Risks: T2T stocks often come with lower trading volumes. This can make it difficult to exit swiftly and often leads to wider bid-ask spreads. 
• 100% Funds Upfront: You should pay the entire amount, meaning that margin trading or leverage cannot be used. 
• Price Circuit Limits: T2T stocks often operate under tighter 5% or 10% price circuit limits. This enhances the risks of being caught in a circuit. 
• Understand the Reason: You should know why the stock in question was moved to the T2T category, i.e. whether to avoid price manipulation or lower excessive speculation. 
• Fundamentals of the Company: Given this is a forced long-term move, you should carefully verify the company's financial health. This helps you bypass any long-term destruction of capital. 
• Broker Requirements: Make sure your trading platform/brokerage supports T2T transactions and displays the T2T segment indicator. 

Settlement Cycle

T2T stocks in India are mandated for compulsory delivery. So, every trade has to be settled through the delivery of shares. This prevents intraday trading or BTST mechanisms. You cannot thus buy and sell the same T2T stock on the same day.

If you buy, you must pay the full amount and receive your shares. If you sell, you should also have the shares in your Demat account. The settlement cycle is usually T+1 or T+2 (trading day + 1 or 2 working days). 

Here is a settlement example worth noting: 

• Day 0 (Monday): You purchase 50 shares of Company X at 10 AM. You cannot sell them on the same day. 
• Day 1 (Tuesday): The 50 shares will be credited to your demat account. 
• Day 1 (Tuesday): You can sell the 50 shares of Company X thereafter. 

How to Check the Exchange List for a Stock

Here are the steps to follow in this regard - 

National Stock Exchange (NSE): 

1. Visit the NSE website. 
2. Go to Products > Equities > Corporate Actions > Security Mechanism 
3. Check for periodic review reports and look for stocks listed under the BE (Book Entry) series. 

Bombay Stock Exchange (BSE): 

1. Visit the BSE website. 
2. Go to Markets > Equity > Investor Deck > Check for the List of Securities in T2T.

If you’re on the broker platform, it may flag T2T stocks with a specific tag (T or BE) or issue a warning before you place your order.

What if the Trade Gets Cancelled?

If any deal is executed in the T2T segment and the clearing member drops it, at that point, the trader will have to give a penalty. The penalty charge for abrogation is Rs. 1000. Assuming the clearing member is engaged with purchasing as well as selling, the penalty for such trade cancellation is Rs. 2000. 

If the member can’t settle the trade because of a few unavoidable reasons, he is expected to take the earlier endorsement of NSSCL to look for augmentation of the settlement date.

Practical Do’s and Don’ts for Traders

When it comes to T2T (trade-to-trade) stocks, here is a practical do/don’t list that you may consider - 

Dos: 

• Ensure 100% funds before buying or selling the shares in your demat account. 
• Use limit orders to avoid buying at high prices or selling at extremely low prices (owing to lower liquidity). 
• Anticipate capital lock-in (plan for your shares/funds to be locked in until settlement). 
• Identify T2T stocks by checking for the BE (Buy Expression) or T series on the website of the exchange or the brokerage platform before buying. 
• Review corporate actions and developments, and research why the stock was moved to the T2T category. 

Don’ts: 

• Intraday or BTST: Do not try to buy and sell on the same day (intraday trading) or BTST (buy today and sell tomorrow). 
• Sell without holdings: Don’t attempt to sell T2T stocks you don't already hold in your demat account. It will lead to order rejection or heavy penalties for short delivery. 
• Neglect volume risks: Don’t trade in T2T stocks that have excessively lower volumes, since you may otherwise get trapped without any buyers for the stock. 
• Assume intraday leverage: Don’t rely on the brokerage to offer margin for T2T stocks, since they require a full upfront payment. 
• Panic with a 5% circuit: Know that T2T stocks may often hit a 5% upper or lower circuit. There is no reason to panic.

Takeaway

T2T Segment might be a complicated segment but it has its own set of advantages. The investor can stay protected by price variations and complete speculations by taking trades in the T2T segment.