SEBI is reinstating the 30-minute volume-weighted average price (VWAP) method for derivatives settlement, effective December 7, to improve market liquidity. This reversal follows a sharp decline in trading volumes seen after the previous auction mechanism was implemented in August. For investors and brokerages, the move aims to fix price discovery issues, though overall market growth will still depend on broader economic stability.
The Securities and Exchange Board of India (SEBI) has announced a significant change to its closing auction rules for derivatives, effectively reverting to the previous 30-minute volume-weighted average price (VWAP) settlement method. This update is scheduled to take effect on December 7. The decision comes after market participants raised concerns about price discovery problems following the introduction of a new auction mechanism in August.
The earlier rule change had led to a sharp drop in trading activity. Between early August and September, trading volumes in the closing auction plunged by 84%, while the total traded value fell by 77%. The restoration of the 30-minute VWAP is intended to resolve these liquidity issues and provide more predictable settlement pricing for traders, ensuring that the market functions smoothly during expiry days.
This regulatory update is particularly relevant for Indian brokerage firms, which faced pressure on their revenue in the recent September quarter. Financial disclosures from companies like Angel One and Groww indicated that broking revenue as a share of their total revenue had declined during this period, partly linked to the market conditions. The expectation among industry observers is that normalizing the settlement process will encourage retail and institutional traders to increase their participation, which could support a recovery in brokerage volumes.
However, investors should note that the regulatory change is only one part of the market picture. Even with more clarity on settlement rules, the sector continues to face challenges from global geopolitical tensions and shifts in investor sentiment. While the new rules include a one-minute transition window to the closing auction to balance efficiency with stability, sustained growth for brokerages will depend on whether the broader market remains stable in the coming months. Market participants will be watching liquidity trends closely once the new rules are implemented in December to see if these changes effectively reverse the recent declines in trading activity.