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Market Foundations & Exchange Microstructure

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Lesson 10/12/Market Foundations/Indian Markets & SEBI/Indices & Segments13 min

Cash Equities (T+1), Futures Basis & Physical vs. Cash Settlement

Market Foundations

Understanding T+1 equity settlement, short-selling auction penalties, futures cost-of-carry basis, and F&O ban periods.

Key Topics & Tags
t+1 settlementfutures basiscost of carryfno banmwplshort delivery

Core Architecture & Intuition

India's equity cash market operates on a T+1 rolling settlement cycle, where intraday equity shorts must be squared off before 3:20 PM to avoid short-delivery auction penalties. For overnight short exposure, traders use Futures or Options.

Futures trade at a theoretical premium to Spot governed by Cost of Carry (`Futures = Spot × e^((r - d)t)`), where `r` is the risk-free interest rate and `d` is expected dividend yield. At 3:30 PM on expiry day, Futures and Spot converge to the exact same price.

Hover over key terms below for instant definitions: Cost of Carry (Basis), MWPL & F&O Ban List, and Short Delivery Auction. For the complete mathematical derivation and edge-case analysis, open .

SPREAD: 0.50 ptsCUM QTYBID (BUYERS)ASK (SELLERS)CUM QTY22,450.001,45022,449.503,20022,449.005,85022,448.508,90022,448.0014,20022,450.501,12022,451.002,98022,451.506,40022,452.009,75022,452.5015,600Price-Time Priority (FIFO): Passive Limit Orders Rest on Book · Aggressive Market Orders Cross the Spread
Futures cost-of-carry basis converging toward spot price as expiry approaches.
!
Caution:In a stock under the F&O Ban, you CANNOT roll a strike or add a hedge leg—you may only close existing legs. Always check the morning F&O Ban list before running stock option bots.

Interactive Concept Breakdown

  • Cost of Carry (Basis) — Negative basis (backwardation) occurs when large dividends are due or heavy short hedging dominates.
  • MWPL & F&O Ban List — During an F&O Ban, only position-reducing (square-off) trades are allowed; opening fresh F&O positions incurs heavy penalties.
  • Short Delivery Auction — Triggers an exchange buy-in auction penalty; never hold cash-segment equity shorts overnight.

Step-by-Step Execution Protocol: Indices & Segments

  1. 1
    Check Daily NSE F&O Ban List at 8:45 AM
    Exclude any stock above 85% MWPL from automated new-entry watchlists.
  2. 2
    Monitor Futures Basis (Premium/Discount)
    Compare Futures LTP against Spot LTP before executing arbitrage or rollovers.
  3. 3
    Square Off Intraday Cash Trades by 15:15 IST
    Ensure all MIS/Intraday equity positions close before broker auto-square-off windows.

Parameters, Rules & Reference Matrix

Parameter / RuleTypeDefaultDescription
futuresBasispoints—FuturesLTP - SpotLTP.
mwplBanThreshold%95% (Entry) / 80% (Exit)Open interest threshold triggering F&O ban.
settlementCycledaysT+1Rolling equity delivery settlement cycle.

Implementation & Quantitative Model

futures-fair-value.ts
export function calcTheoreticalFutures(spot: number, annualRate = 0.068, daysToExpiry = 15, expectedDividend = 0) {  const carry = spot * annualRate * (daysToExpiry / 365);  return Number((spot + carry - expectedDividend).toFixed(2));}

Desk Verification Checklist

Confirm before deploying live capital

  • Fetch and filter out the NSE F&O Ban list every morning before 9:00 AM.
  • Account for upcoming ex-dividend dates when pricing stock futures and puts.
  • Square off all intraday cash-equity shorts before 3:15 PM.

Cross-reference standard risk definitions such as drawdown, slippage, and when auditing your logs.

More in Indices & Segments

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