The Securities and Exchange Board of India has proposed stricter rules for the closing auction session to reduce extreme price swings in derivative-linked stocks. Key measures include removing indicative index values during the auction and revising settlement price calculations. The goal is to curb speculative trading, particularly on weekly expiry days, where retail investors often face high volatility and financial losses.
The Securities and Exchange Board of India (SEBI) has proposed changes to the closing auction session (CAS) mechanism to address high volatility in stocks linked to derivatives. The closing auction session is a specific window between 3:15 pm and 3:35 pm, designed to establish a stable final price for the day. However, regulators have observed that the current process often leads to erratic price movements, particularly on weekly expiry days when trading activity in index options is at its peak.
One of the primary proposals involves removing the display of indicative index values during the closing auction. Currently, exchanges show these estimated prices, which often fluctuate because orders can be changed or cancelled until the session ends. By removing these indicative numbers, SEBI aims to reduce the noise that influences trader behavior in the final minutes of the session, preventing panic-driven buying or selling.
To further maintain market integrity, the regulator plans to restrict the cancellation of limit orders that are placed more than 1 percent away from the reference price. This rule is designed to prevent attempts to manipulate the closing price of index constituents. When large orders are placed and then cancelled just before the market closes, it can artificially inflate or deflate the price, affecting all participants.
Another significant proposal addresses how the final settlement price is calculated. SEBI plans to introduce a volume-weighted settlement price for expiry days. Instead of relying solely on the auction price, the new calculation would consider the actual trading volume from the final 30 minutes of continuous trading combined with the auction equilibrium price. This approach ensures that the settlement price reflects genuine demand throughout the end of the day, rather than being influenced by isolated, low-volume orders that occur during the final minutes.
These proposals come as part of a broader effort by the regulator to address risks associated with the massive growth in index options trading. Market data indicates that index options make up the vast majority of equity derivative contracts in India. Retail interest in these instruments has surged, but so has the risk of significant financial loss during volatile sessions. By curbing the 'gaming' of the closing auction, SEBI aims to protect investors from sudden price swings and ensure the market closes on a stable note.
Investors and traders should track the next steps, including the formal release of a circular or official regulation by SEBI following the consultation process. This will clarify when these new measures will be implemented and how they will interact with existing exchange trading systems.