Market experts have welcomed the Securities and Exchange Board of India's proposed changes to the expiry-day trading framework, stating that the measures could help curb volatility and potential manipulation during the closing auction, while also making the settlement process simpler and more transparent.
SEBI has proposed changes to the Closing Auction Session market timings and settlement methodology for derivative contracts in a consultation paper released on Saturday. Among the key proposals are delinking derivatives settlement prices from the cash market closing price, discontinuing the dissemination of live indicative index values during the CAS and making orders placed beyond the one percent price band more binding.
Anand Rathi Wealth Ltd
Feroze Azeez, Joint CEO at Anand Rathi Wealth Ltd, said that the regulator had addressed three key concerns related to the existing framework. He stated that the proposal to allow derivative contracts to be settled at a price different from the cash market closing price was particularly significant, arguing that cash and derivative markets serve different purposes.
He also stated that stopping the dissemination of indicative index values during the closing auction could reduce volatility arising from unexecuted orders, while making aggressive orders beyond the one percent band more binding could limit manipulations through cancellations.
Azeez backed other proposals, including allowing iceberg orders during CAS, shortening the transition period and reducing the post-CAS derivatives trading window to five minutes.
Alpha AMC
Rajesh Singla, CEO and Fund Manager at Alpha AMC, said that the closing auction mechanism was conceptually sound but its implementation had exposed gaps, particularly in thinner stocks where concentrated price discovery could amplify expiry-day volatility.
Singla suggested that SEBI should consider measures beyond changes to trading timings, including mid-session auction price disclosures, incentives for market makers and phased implementation across different market cap segments.
Tradejini
Trivesh Dinesh, COO at Tradejini, supported SEBI's proposal to calculate expiry-day settlement prices using the volume weighted average price (VWAP) of trades during the final 30 minutes of continuous trading, describing it as a simpler and more established methodology.
Dinesh also supported allowing regular trading to continue until 3:30 pm before the closing auction begins, stating that the arrangement would create a more intuitive market structure. He said that discontinuing live indicative index values during the CAS could help prevent unnecessary volatility and confusion, while continuing to publish indicative prices for individual securities would assist participants in the auction.
Why is SEBI Revisiting CAS?
SEBI's proposals follow feedback from market participants over the use of the CAS determined closing price for settling derivative contracts on expiry. The determination of derivative settlement prices using the closing price arrived at through CAS was among the significant areas of feedback received by the regulator.
The CAS was introduced in the equity cash segment for stocks having derivatives contracts from August 3, with the objective of enabling efficient and transparent price discovery for closing prices.
Before the introduction of CAS, closing prices were determined using the VWAP of trades executed during the final 30 minutes of continuous trading. Under the CAS mechanism, the closing price is determined through an equilibrium price discovery process based on aggregate buy and sell orders placed during the auction.
(With PTI inputs)
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