From mint · Apoorva Ajith,Ram Sahgal · · 2m
Sebi to adopt blended pricing for derivatives
Sebi likely to use mixed pricing to reduce volatility in stock options.
In brief
Sebi likely to use mixed pricing to reduce volatility in stock options. Sebi will implement a blended pricing framework combining VWAP and auction prices to curb expiry-day volatility in derivatives. Originally reported by mint.
Sebi likely to adopt blended pricing framework
Sebi will combine volume-weighted average price from last 30 minutes of trading with closing auction prices to reduce expiry-day volatility in derivatives.
“The market regulator is likely to consider a blended VWAP from the get-go. The idea is to delink the pricing from being derived solely by CAS. If you delink it using VWAP, that should solve the problem.”
Current system causes volatility
Derivatives settlement prices rely on the 10-minute auction, which has thin trading volumes and contributes to price distortions on expiry days.
“It’s unlikely that the regulator would want to have two pools of liquidity, one VWAP for the weekly and monthly expiry days and the other blended price on non-expiry days.”
Sebi reviewed framework in September
Sebi reviewed the blended pricing framework through a consultation paper in September after market participants pushed back over liquidity issues during the auction.
“Sebi reviewed the framework through a consultation paper in September, following pushback from market participants over a liquidity squeeze during the”
Blended pricing combines VWAP and CAS
The blended approach uses volume-weighted average price from the last 30 minutes of continuous trading and prices discovered in the 10-minute closing auction session.
“The proposed approach would combine the volume-weighted average price (VWAP) of trades during the last 30 minutes of continuous trading with prices discovered in the 10-minute closing auction session (CAS).”
Why CAS struggles in India
The auction-based system has low trading volumes in India due to operational challenges and early closure of continuous trading sessions.
“Initial operational challenges, including the need for market participants to modify their trading software and the early closure of the continuous trading session (CTS), have kept some participants, including arbitrage funds, away.”
Volumes on CAS are low
CAS volumes on NSE are around ₹1,000-1,200 crore, roughly a fifth of those in the final 15 minutes of continuous trading.
“Volumes on the CAS on NSE, at around ₹ 1,000-1,200 crore, are roughly a fifth of those recorded during the final 15 minutes of the earlier continuous trading session”
Sebi chairman timeline
Sebi chairman Tuhin Kanta Pandey said the regulator would issue final guidelines on CAS in about a week’s time.
“Sebi chairman Tuhin Kanta Pandey said on 10 October that the regulator would issue final guidelines on CAS in "about a week’s time".”
Market participants' view
Many market participants believe CAS will become more liquid after a one-year transition period before fully adopting blended pricing.
“Market participants believe that CAS would become more liquid after a one-year time frame”
Blended pricing mechanism
The blended calculation would use VWAP for either 2:45-3:15 p.m. or 3-3:30 p.m. combined with CAS prices for either 3:20-3:30 p.m. or 3:30-3:40 p.m.
“According to the people cited above, the blended calculation could use the VWAP for either 2:45-3:15 p.m. or 3-3:30 p.m., combined with the CAS price for either 3:20-3:30 p.m. or 3:30-3:40 p.m.”
Sebi to restrict order cancellations
Sebi will likely restrict cancellation of limit orders priced beyond ±1% of the reference price to curb price swings during auctions.
“A cancellation of order closer to the price band leads to prices being influenced heavily. The move is expected to curb such price swings that have kept several participants away from the closing auction”
What happens next
Sebi will issue final guidelines on CAS in about a week, implementing blended pricing to reduce expiry-day volatility in derivatives.
“Sebi will issue final guidelines on CAS in about a week’s time”
The headline
Sebi will implement a blended pricing framework combining VWAP and auction prices to curb expiry-day volatility in derivatives.
