Are there risks involved in using BTST orders?

BTST is an order type wherein you can take a position and sell it on the settlement day (T+1). 

The risk of trading using the BTST order facility is that since you are selling shares that you don't actually hold in your demat account and you rely on the initial seller for delivery. If this seller defaults/short delivers, you face the risk of defaulting on your delivery obligation as a seller (when you close the position). 
If this happens, you will have to pay an auction penalty, if any, which can be up to 20% of the value short delivered by you. 

For example: 
  • Ms Gita buys 100 shares of ICICI Bank on Monday (T) as a BTST order. These shares will be credited to her demat account on Tuesday (T+1).
  • On Monday (T), she observes that she has made a decent profit. She decides to square off her BTST position and sell the 100 shares bought. Delivery of these shares is due on Tuesday (T+1).
  • However, the seller of the 100 shares she bought on Monday defaults on delivery. As a result, she receives an email stating that the shares were short delivered on Tuesday (T+1 from the buy trade which was on Monday). This will be settled through an auction on Tuesday, provided there are sellers.
  • As a result, on Thursday, Ms Gita will not be able to deliver the shares she sold on Monday. Hence, this too will be settled through an auction on Tuesday and she will be liable to pay the auction penalty charges.

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