Title: What a “Buy-In” Means in Securities Trading
Definition
– Buy-in (trading context): A buy-in is when an investor who purchased securities does not receive them because the seller failed to deliver. To remedy that failure, the buyer (through the exchange or their broker) buys the required shares from another seller. The original seller who failed to deliver is generally required to cover any extra cost incurred.
– Alternate meanings: The term “buy-in” can also mean (1) the act of purchasing an ownership stake in a company, or (2) the psychological process by which people accept or support an idea.
How a buy-in happens (step-by-step)
1. Trade executes on trade date (T = 0).
2. The seller is supposed to deliver the securities by the settlement date (commonly T+2 business days).
3. If the seller does not deliver, the buyer (or exchange/broker on the buyer’s behalf) issues a buy-in notice to the exchange.
4. Exchange notifies the non‑delivering seller and arranges for the buyer to obtain the securities from another market participant.
5. If the replacement purchase costs more than the original trade, the non‑delivering seller typically must pay the difference. If the seller does not respond, the buyer’s broker may purchase the securities and require the client to reimburse the broker at an agreed price.
Forced buy-in vs. ordinary buy-in
– Ordinary buy-in: Occurs because a seller did not deliver purchased securities on the settlement date. The buyer seeks replacement shares to complete settlement.
– Forced buy-in: Applied to short positions. If a lender recalls lent shares or a broker cannot re-borrow shares to cover a short, the short seller’s position may be closed by buying shares in the market—sometimes without prior notice to the account holder. This is essentially the short-side equivalent of being forced to cover.
Settlement background (why buy-ins matter)
– Most equity and many debt trades settle on a T+2 schedule: trade date plus two business days. Some instruments settle faster (T+1) or on the same day (cash trades).
– If delivery fails by the scheduled settlement date, a buy-in procedure can be triggered so the buyer ends up with the securities and the market’s obligation to settle is restored.
Checklist: What to expect or do if a buy-in notice arrives
– Confirm the notice: Check trade date, settlement date, and which account/position is referenced.
– Contact your broker: Ask whether the broker or exchange will execute the buy-in and whether you must respond.
– Check pricing terms: Understand the mechanism for any reimbursement (how the price difference is calculated and if there is a predetermined payback price).
– Track replacement cost: If your counterparty failed to deliver, note the original trade price and the replacement purchase price.
– Record and save documentation: Keep the notice, trade confirmations, and any communications for compliance or dispute resolution.
Small worked example
Assumptions:
– Buyer purchased 100 shares at $20.00 per share on T = 0 (settlement expected T+2).
– Seller fails to deliver by settlement.
– Exchange arranges a replacement purchase at $22.50 per share.
Calculations:
– Original cost = 100 × $20.00 = $2,000.
– Replacement cost = 100 × $22.50 = $2,250.
– Difference owed by non-delivering seller = $2,250 − $2,000 = $250.
Result:
– Buyer receives 100 shares (settlement completed).
– The original seller is typically required to pay the $250 shortfall. If the seller ignores notices, the buyer’s broker may purchase and then require reimbursement from the failing party or the client, according to the account agreement.
Key assumptions and limits
– Procedures and timing for notices, forced buy-ins, and reimbursement can vary by exchange, broker, and jurisdiction.
– This explanation follows the standard sequence used when delivery fails; actual brokerage agreements may specify different operational details (for example, how a broker sets the “predetermined price” the client must pay).
Sources for further reading
– Investopedia — Buy-In: https://www.investopedia.com/terms/b/buyin.asp
– U.S. Securities and Exchange Commission (SEC) — Settlement Cycle: https://www.sec.gov/fast-answers/answers-settlementhtm.html
– Financial Industry Regulatory Authority (FINRA) — Short Selling basics and related rules: https://www.finra.org/investors/learn-to-invest/key-topics/short-selling
– Nasdaq — What is the T+2 Settlement Cycle?: https://www.nasdaq.com/articles/what-is-the-t2-settlement-cycle
Educational disclaimer
This explainer is for educational purposes only and is not individualized investment, legal, or tax advice. Procedures and obligations can differ by broker, exchange, and country; consult your brokerage agreement or a qualified professional for guidance about a specific situation.