Trading Account Settlement

Trading Account Settlement
  A system of settling exchange transactions where each trade has is paid into a trading account with the exchange. At the end of the settlement period only the balance of the account has to be settled. This balance can, of course be either negative of positive, depending upon the profitability of the traders dealing during the settlement period. For example a trader buys a $100,000 block of shares on Monday and the exchange is trading on a 10 day settlement period. The settlement account for the trader is `debited' by the full $100,000 amount. The trader then sells the shares on three days later for $98,000 (not a good deal for the trader but the market has turned against her this time). The trading account is credited with $98,000. The trader therefore only has to pay the $2,000 outstanding by the second following Friday. The key feature for the trader is that she has only to find the $2,000 cash value of the net account position. The trading account is therefore a form of interest free credit for the trader if the trader owes money on the account. The alternative settlement method is called rolling settlement.

International financial encyclopaedia . 2014.

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