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I know its not legal to have open long and short position on specific security (on two stock exchanges - NSE/BSE), but where exactly is this restriction defined (SEBI regulation? where can I find it?)

Also is it legal to have long position on stock and short its derivative (future/option)?

Thank you!

  • Are you sure? That's news to me. There is no reason to forbid via law to waste your money on a bad investment. – Aganju Jul 23 '17 at 18:39
  • Ever heard about arbitrage? – yety Jul 24 '17 at 0:44
  • Sure but the distance between long and short is typically too large to make arbitrage gains. You'd rather trade the same thing in different markets. But feel free. My point is why should it be forbidden?? – Aganju Jul 24 '17 at 0:51
  • You're right - and of course I'm not going to do that manually. About legality - see tradingqna.com/t/… – yety Jul 24 '17 at 0:56
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    I don't consider a random post by some random guy on some website proof for it being illegal. – Aganju Jul 24 '17 at 1:00
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I know its not legal to have open long and short position on specific security (on two stock exchanges - NSE/BSE)

There is nothing illegal about it. There are prescribed ways on how this is addressed.

In Cash Segment / Intra Day trades:

One can short sell a security. If by end of day he does not buy the security; it goes into Auction. The said security is purchased on your behalf. Any profit or loss arising out of this is charged to you.

Similarly one can buy a security; if one does not pay the amount by end of day; it would go into auction and sold. Any profit or loss arising out of this is charged to you.

If you short sell a security on one exchange; you have to buy it on same exchange. If you buy on other exchange; it will not be adjusted against this short position.

Also is it legal to have long position on stock and short its derivative (future/option)?

There are no restrictions.

Edit:
@yety Party A shorts 10 shares of HDFC today in Intra-Day Cash Segment purchased by Party B. Rather than buying back 10 shares or allowing it to go into auction... Party A borrows 10 HDFC Shares from "X" via SLB for a period of say 6 months [1 month to 1 year]. This is recorded as Party A obligation to "X". These 10 borrowed shares are transferred to Party B. So Party "X" doesn't have any HDFC shares at this point in time. However in exchange, Party X receives fees for borrowing from Party A. If there is dividend, are declared, Company pays Party B. However SLB recovers identical amount from Party A and pays Party X. If there is 1:1 split, now party A owes Party X 20 HDFC Shares. On maturity [after 6 months], Party A has to buy these from market and given back the borrowed shares to Party X.

If there are some other corporate actions, i.e. mergers / amalgamations ... the obligation of Party A to Party X is closed immediately and position settled.

Of course there are provisions whereby party A can pay back the shares earlier or party X can ask for shares earlier and there are rules/trades/mechanisms to facilitate this.

  • Perfect! This also means that for shorting on intraday basis I don't have to go through SLB mechanism right? (to borrow stock and avoid naked short) – yety Jul 24 '17 at 8:42
  • @yety Yes that is right. You can short intra-day and make good the security end of day. If you don't do it will go via auction and you will be automatically hit with profit or loss. If you are not sure to buy by end of day, you can go via the SLB mechanism. – Dheer Jul 24 '17 at 9:57
  • Yes, and there is no SLB on derivatives right? So how is it possible that you can hold them short until expiry - you should somehow pass short delivery on settlement which normally leads to auction. – yety Jul 24 '17 at 11:14
  • @yety see edits. – Dheer Jul 24 '17 at 11:32

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