14 hrs ago
Market Experts Back Sebi Reforms to Curb Expiry-Day Volatility
India’s market regulator, Sebi, wants to change how some stock-market contracts are settled on expiry days.
The changes are meant to reduce sudden price swings and possible manipulation during the closing auction.
One proposal would stop using the cash market’s closing price as the automatic settlement price for derivatives.
Another would stop showing live indicative index values during the auction.
Sebi also wants orders placed far outside the normal price range to be harder to cancel.
Some experts think the last 30 minutes’ average trading price would be the easiest settlement method.
Other experts support improving the auction itself and adding measures for market makers.
The plan would let regular trading continue until 3:30 pm before the auction starts.
Sebi introduced the closing auction in the cash market to improve price discovery, but feedback highlighted problems when it was used for derivatives settlement.
Sebi proposed overhauling expiry-day trading rules after receiving feedback on closing-auction settlement of derivatives.
The proposals would delink derivative settlement prices from cash-market closing prices and end live indicative index values during the Closing Auction Session.
Sebi also proposed making orders placed beyond the one per cent band more binding to limit cancellations and potential manipulation.
Some experts supported using the last 30 minutes’ continuous-trading VWAP as a simpler settlement method, while others backed auction-related refinements.
The proposals include continuing regular trading until 3:30 pm, shortening post-auction derivatives trading to five minutes and allowing iceberg orders in the auction.
- Who
- The Securities and Exchange Board of India (Sebi), market experts and derivatives-market participants.
- What
- Sebi proposed reforms to expiry-day trading, including changes to settlement prices, closing-auction rules, market timings and order treatment.
- Where
- In India’s equity cash and derivatives markets.
- When
- The consultation paper was floated on Saturday; the Closing Auction Session was introduced from August 3, with no year specified in the articles.
- Why
- To address expiry-day volatility, potential manipulation, settlement complexity and concerns arising from using Closing Auction Session prices for derivatives.
Auction-Focused Reform
Simpler VWAP Settlement
Settlement methodology
Auction-Focused Reform
Feroze Azeez said derivatives should not necessarily settle at the cash-market closing price and cautioned that blending continuous trading with the auction could add complexity.
Simpler VWAP Settlement
Trivesh Dinesh favoured determining expiry-day settlement prices using the volume-weighted average price during the final 30 minutes of continuous trading because it is simpler and established.
Addressing auction weaknesses
Auction-Focused Reform
Rajesh Singla said the closing auction is conceptually sound but needs measures such as mid-session auction-price disclosures, market-maker incentives and phased implementation across market-cap segments.
Simpler VWAP Settlement
Dinesh supported a clearer structure in which regular trading continues until 3:30 pm before the closing auction begins.
Indicative prices
Auction-Focused Reform
Azeez and Dinesh supported ending live indicative index values because unexecuted orders can create volatility and confusion; Dinesh said security-level indicative prices could remain useful.
Simpler VWAP Settlement
The articles do not report opposition to ending live indicative index values, but Dinesh distinguished index-level disclosures from security-level indicative prices.
Key facts
- Regulator
- Securities and Exchange Board of India (Sebi)
- Main concern
- Volatility and potential manipulation during the Closing Auction Session
- Settlement proposal
- Delink derivatives settlement prices from cash-market closing prices
- Auction disclosure
- Discontinue live indicative index values during the Closing Auction Session
- Order rule
- Make orders placed beyond the one per cent band more binding
- Trading timing
- Allow regular trading until 3:30 pm before the closing auction
- Post-auction window
- Reduce post-Closing Auction Session derivatives trading to five minutes
Quotes
Trivesh Dinesh
COO at Tradejini
“The most important development is that a derivatives contract need not be settled at exactly the cash-market closing price. Sebi has recognised that the cash and derivatives markets serve different purposes,”
rediff.com
“The objective should be to have a settlement methodology that is transparent, easy to understand, and consistent for all market participants,”
rediff.com
Sources
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