Definition
Auction Settlement
Auction settlement is the exchange process of buying in shares to resolve a short delivery, where the clearing corporation auctions the failed quantity and delivers the purchased shares to the affected buyer.
When a seller defaults on delivery in the Indian market, the clearing corporation runs a buy-in auction the next day to source the shares from other members. The defaulting seller is charged the auction price plus penalties, and any shortfall versus the buyer's entitlement is settled in cash at a close-out rate.
Auction prices can be significantly higher than the prevailing market because the buy-in must succeed, creating a strong deterrent against short delivery. The mechanism protects the buyer, who receives either the shares or financial compensation, preserving confidence in the settlement guarantee of the netting system.
Related terms
- Clearing CorporationA clearing corporation is the entity that clears and settles trades on an exchange, becoming the buyer to every seller and the seller to every buyer through novation, and guaranteeing settlement.
- Short DeliveryShort delivery occurs when a seller fails to deliver the shares they sold by the settlement deadline, leaving the buyer's trade unfulfilled and triggering an exchange auction to source the shares.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.