Sebi considers blended pricing framework to reduce derivatives expiry-day volatility

The Securities and Exchange Board of India is likely to adopt a blended pricing framework for calculating settlement prices in the derivatives segment to curb sharp price swings and distortions on expiry days. According to three people aware of the development, the proposed approach will combine the volume-weighted average price of trades during the last 30 minutes of continuous trading with prices discovered in the 10-minute closing auction session.

Details and Pushback

The regulator reviewed this framework through a consultation paper in September following pushback from market participants over a liquidity squeeze during the auction. The current closing auction session system, introduced on 3 August, has suffered from thin trading volumes because operational challenges and early closures of continuous trading have kept participants like arbitrage funds away. Volumes on the closing auction session at the National Stock Exchange stand at roughly one thousand to twelve hundred crore rupees, which is about a fifth of the volume recorded during the final 15 minutes of the earlier continuous trading session. Under the blended methodology, the settlement price for 213 stocks including those in the Nifty and Sensex indices will use a combination of trading windows across exchanges.

Order Restrictions

Sebi is also likely to proceed with a proposal to restrict the cancellation of limit orders priced beyond plus or minus one percent of the reference price. The price band applicable during the auction is plus or minus three percent of the reference price, and some participants were placing limit orders at the edge of this band before cancelling them to influence prices. Tuhin Kanta Pandey stated on 10 October that the regulator would issue final guidelines in about a week's time.

Context

Derivatives markets rely heavily on accurate settlement pricing to determine contract payouts on expiry days, making fair price discovery essential for stability. Market regulators frequently adjust trading mechanisms when new systems create unexpected liquidity bottlenecks or price distortions.