The Securities and Exchange Board of India’s (SEBI) Secondary Market Advisory Committee (SMAC) has favoured retaining the existing methodology for calculating settlement prices for index and stock derivatives on expiry days for at least one year, according to sources familiar with the discussions.
Earlier, settlement prices were calculated using the volume-weighted average price (VWAP) of trades executed between 3:00 pm and 3:30 pm during the continuous trading session. The panel has preferred this approach over a blended formula that would incorporate prices from the 10-minute Closing Auction Session (CAS), sources said.
The review follows concerns raised by market participants after SEBI implemented the CAS for stocks in the futures and options (F&O) segment on August 3. The auction-based mechanism replaced the earlier process for determining closing prices to improve transparency, but limited participation led to sharp price spikes during the auction, particularly on derivatives expiry days.
Settlement Options
This prompted SEBI last month to seek feedback on two alternatives: calculating settlement prices using a combination of the final 30 minutes of continuous trading and the 10-minute closing auction, or retaining the existing CTS-based VWAP as an interim arrangement.
“The committee has favoured retaining the existing methodology for at least a year so that the market has enough time to assess the impact of the closing auction before moving to a blended formula,” one of the sources said.
The panel has also favoured changes to trading hours under the CAS framework. Normal trading in stocks covered by the auction would continue until 3:30 pm, followed by a one-minute transition period. The closing auction would run from 3:31 pm to 3:40 pm, while derivatives trading would be permitted until 3:45 pm, providing traders with an additional five minutes after the auction concludes, sources said.
The committee has also favoured continuing not to disseminate the indicative equilibrium price (IEP)-based index value, given concerns that traders might mistake it for the actual index level.
An IEP indicates the price at which buy and sell orders in an individual stock could potentially match during the auction. An index value derived from these indicative prices is merely a theoretical calculation and does not represent executed trades.
For iceberg orders, which allow traders to place large orders while displaying only a portion of the total quantity at a time, the committee has favoured allowing orders to remain valid either until 3:30 pm or until 3:40 pm. The full quantity of orders valid through the auction would be visible in the CAS order book.
The recommendations are expected to feed into SEBI’s forthcoming circular on the closing auction framework. An email sent to SEBI did not elicit a response.
However, the treatment of market orders remains under consideration. Market participants have raised concerns that large orders placed and subsequently cancelled during the auction could influence the IEP and create opportunities for price manipulation. SEBI is examining measures to mitigate these risks.