The Securities and Exchange Board of India (SEBI) is considering applying dynamic price bands for stocks forming part of any exchange’s derivatives segment in order to improve trading consistency and price discovery, according to people aware of the discussions.
So if a stock is part of the futures and options (F&O) segment on any one exchange, it would move to dynamic price bands across all exchanges. This plugs the gap that currently leaves room for short-lived but meaningful inconsistencies between exchanges.
At present, timing differences in the inclusion or removal of stocks from the derivatives segment can create a gap of a few trading days.
For instance, if NSE adds a stock to F&O on Wednesday, that stock immediately shifts to dynamic price bands on NSE. But on BSE, the same stock may remain under fixed 20 per cent price bands until Friday, when its derivatives contracts begin. In the reverse case, the mismatch can stretch from Friday to Tuesday, depending on which exchange acts first.
The same problem arises when a stock is removed from derivatives trading. If NSE removes it on Wednesday, the stock reverts to fixed price bands there immediately, while BSE may continue treating it as a derivatives stock until Friday. That again creates a temporary divergence in how the same stock is regulated on the two exchanges.
The people said the regulator sees this as a regulatory gap that needs to be addressed. “The proposal aims to eliminate temporary mismatches during entry and exit phases, ensure uniform trading conditions, and prevent price distortions,” one of the sources said.
Dynamic bands
Dynamic price bands allow price movement to widen step by step, usually beginning at 10 per cent, then expanding to 15 per cent and 20 per cent, with further relaxations possible in strong market conditions. Fixed bands, by contrast, typically cap movement at 20 per cent in a day.
When one exchange applies dynamic bands and another still imposes fixed limits on the same stock, it can create a distorted trading picture, open up arbitrage opportunities and confuse investors, market participants said.
The markets regulator is expected to come out with a circular on the same soon.