Auction market on NSE and BSE

The auction market on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) is a special trading session conducted by the exchange’s clearing corporation to resolve cases where sellers in the normal equity settlement fail to deliver the shares they are obligated to deliver. This non-delivery, called a short delivery, arises when a seller who executed a trade on the exchange does not place the required shares into the clearing system by the settlement deadline. To protect the buyer, the exchange runs an auction to procure the undelivered shares from willing sellers.

The auction market is distinct from the regular continuous trading session and operates under separate rules, timing, and price constraints.

Why auctions arise

Under India’s T+1 settlement system, a seller who executes an equity trade on Day 0 (T) must deliver shares to the clearing corporation by Day 1 (T+1). If the seller’s broker fails to receive the shares from the seller in time, the settlement obligation goes into default. The clearing corporation (NSE Clearing Limited for NSE; Indian Clearing Corporation Limited for BSE) then initiates an auction to source the shares from third parties.

Common causes of short delivery include:

• BTST (Buy Today Sell Tomorrow) failures: A BTST seller was relying on receiving shares from their own Day 0 purchase, but those shares were not delivered to them due to their own seller’s default.
• Demat account issues: The selling client did not have sufficient shares in their demat account due to a previous failed settlement.
• Broker-level settlement failures: In rare cases, broker operational errors result in settlement failures.
• Physical certificate holders: Historical cases involving shares in physical form (now rare after mandatory dematerialisation).

How the auction process works, NSE

NSE’s auction session is typically conducted on the T+2 working day (settlement day plus one, under T+1 settlement this means two working days after the original trade). The session runs during a specific morning window, currently approximately 9:55 AM to 10:00 AM on NSE, though this timing is subject to exchange notifications and may be updated.

The auction session mechanics are:

1. Auction notice: The exchange publishes a list of securities going to auction, specifying the quantity to be auctioned.
2. Offer period: Sellers submit auction offers at prices they are willing to sell. Buyers who failed to receive delivery participate as the receiving parties but do not actively bid, they receive at the auction-determined price.
3. Auction price determination: NSE determines the auction price. Under NSE’s rules, the highest price prevailing from the following set is used: the last traded price from the previous day, the highest trade price on the day of auction, and any applicable price bands. The specific formula is published in NSE’s auction guidelines.
4. Settlement: The auction seller delivers shares; the defaulting original seller is debited at the auction price plus a penalty. The buyer (who originally did not receive their shares) receives the shares at the auction price, which may differ from their original trade price.

Price bands in auction

Auction orders are constrained by price bands that differ from normal circuit limits:

• Upper limit: Usually 20% above the previous close (higher than the standard 10% or 20% circuit for normal trading), allowing auction offers to be placed at premium prices.
• Lower limit: Usually 20% below the previous close.

The wider price bands reflect that auction sellers may need to be incentivised by higher prices to offer shares on short notice, and that the auction mechanism needs to function even when the stock’s normal circuit has been hit.

Who can participate in the auction?

Any trading member with an active account on NSE or BSE can place auction sell offers on behalf of their clients. Retail investors can participate through their brokers, though in practice the auction session is not widely used by retail traders. Clients who hold shares and are willing to sell them at the auction price can instruct their broker to place auction offers.

On Kite, Zerodha does not currently provide a direct retail interface for placing auction offers. Zerodha handles auction participation at the broker level for settlement obligations. Retail clients wishing to participate in auction sessions as voluntary sellers should contact Zerodha’s support.

How the defaulting seller is penalised

The original seller who failed to deliver shares does not benefit from any price movement between their original trade price and the auction price. The clearing corporation:

1. Buys back shares in the auction at the auction price.
2. Debits the defaulting seller’s account for the auction price (which is typically higher than the original trade price).
3. Charges an additional penalty (a percentage-based auction settlement charge plus an administrative fee).

The defaulting seller therefore bears:

• The cost difference between their original sale price and the higher auction price.
• An additional penalty fee.

This penalty structure is designed to incentivise sellers to ensure they deliver shares on time and to compensate the buyer for the inconvenience of delayed settlement.

How the buyer receives settlement

The buyer who did not receive their shares on T+1 receives shares through the auction settlement on T+2 (the auction settlement day). The buyer’s clearing obligation is settled at the auction price, not the original trade price. If the auction price is different from the original trade price, the buyer receives an adjustment:

• If the auction price is higher than the original trade price, the buyer receives shares valued at the higher price. The difference may be settled in cash or the buyer absorbs the cost depending on exchange rules.
• If the auction price is lower than the original trade price, the buyer receives a cash credit for the difference.

Close-out in the absence of auction sellers

If no sellers participate in the auction session for a particular security (because the stock is illiquid and no one is willing to sell), the exchange performs a close-out instead of an auction. The close-out price is typically the highest of:

• The original trade price plus a penalty rate.
• 20% above the last traded price (or similar exchange-defined formula).

The defaulting seller is debited at the close-out price and the buyer is compensated in cash. No shares change hands in a close-out; the settlement is entirely cash-based.

Pre-open and continuous session, not auction markets

The pre-open call auction session (9:00–9:08 AM on NSE for equity) is a separate mechanism from the settlement auction market described in this article. The pre-open call auction is a price discovery mechanism where all orders (market and limit) placed before the regular session open are matched at an equilibrium price. This is a normal feature of daily trading, not a settlement remedy.

The term “auction” therefore has two distinct meanings in Indian market context:

• Pre-open call auction: Regular price discovery mechanism at the start of each trading session.
• Settlement auction: A remedy mechanism for delivery shortfalls, conducted separately from normal trading hours.

Auction and BTST traders

BTST traders, who sell shares received from the previous day’s purchase before they are credited to the demat account, face auction risk if their own Day 0 buy does not settle (due to their seller’s default). In such a case, the BTST trader’s sell becomes a delivery shortfall, and the BTST trader faces:

• The auction settlement for the shortfall.
• An auction penalty charge from Zerodha/the clearing corporation.

This is the primary financial risk of BTST trading and explains why BTST is generally advised only in highly liquid stocks with near-zero settlement failure rates.

Regulatory context

The auction market framework is regulated by SEBI under its clearing and settlement circulars. NSE Clearing Limited and Indian Clearing Corporation Limited (ICCL) are responsible for administering the auction process under SEBI’s framework. SEBI’s circulars on settlement shortfalls specify the penalty structure, price determination methodology, and timelines. NSE’s circulars on auction sessions (NSE/MEM series) provide the operational details for trading members.

References

1. NSE circular on auction settlement process, NSE/MEM/2019 series.
2. SEBI circular on settlement shortfall and auction mechanism, SEBI/HO/MRD/2023.
3. NSE Clearing Limited settlement procedures, Chapter 7: Auction Market.
4. BSE/ICCL circular on short delivery and auction process, BSE/Notice/2019 series.
5. Zerodha support article: “What is an auction market?”, support.zerodha.com.