Whalesbook
Improving Liquidity Management
SEBI's plan to create strike prices dynamically is a deliberate move to help Indian exchanges better handle fast price changes. By allowing new strike prices to be added during trading hours, the regulator acknowledges that current systems, which rely on fixed intervals, struggle to keep up with modern trading speeds driven by algorithms. This change will help exchanges keep available contracts closer to the current market price, reducing losses for traders when prices shift significantly within a day.
Global Context and Competition
Unlike markets in the U.S. or Europe, where trading is often concentrated with many buyers and sellers, India's derivatives market is heavily influenced by retail investors and depends on available strike prices. Past periods of high volatility have shown that when strike prices are limited, traders face worse prices, especially for options far from the current market value. By setting a standard for how to offer both in-the-money and out-of-the-money options, SEBI aims to match global standards that focus on narrow price differences during extreme market moves. This is similar to how global index providers adjust their offerings based on actual volatility rather than fixed schedules.
Potential Challenges Ahead
Some experts worry that this new system could make trading more complex and put a strain on exchange technology. Adding derivatives in real-time based on rules might split liquidity if not managed perfectly by software. There's a concern that too many strike prices could spread trading interest too thin, creating a situation where prices are visible but not enough trading volume exists for large institutional hedges. Additionally, if exchanges have to review and adjust these strikes daily, the regulatory workload increases, requiring careful oversight to ensure the models used don't favor certain trading styles or market conditions.
Integration and Future Trading
How well this system works will depend on the outcome of discussions, which are expected to conclude by mid-June. Market participants anticipate that adopting a dynamic model will require brokerage firms to update their risk management systems, as their tools for calculating margins will need to process these new contracts immediately. If approved, this framework will significantly change how people trade intraday, moving India's derivatives market toward a more automated system that responds to volatility and prioritizes continuous trading opportunities over older, fixed schedules.