India’s equity-derivatives market may continue its recovery after the Securities and Exchange Board of India (SEBI) reverted to an earlier price settlement mechanism. The regulator’s move aims to ease confusion and restore trader confidence.
On Thursday, SEBI announced that derivative settlements on expiration days would use the volume-weighted average prices of underlying stocks during the final 30 minutes of continuous trading. This reverses a key feature of the closing auction session introduced on August 3, which caused significant market disruption.
Dhiraj Relli, managing director of HDFC Securities Ltd., stated, Participants going ahead will have greater clarity and predictability around expiry settlement prices.
He believes this change will help restore trader confidence and potentially bring derivatives volumes closer to pre-CAS levels.
The closing auction session led to a decline in trading activity, with average daily turnover in equity derivatives falling to an 18-month low on the National Stock Exchange of India Ltd. and by one-third on the BSE Ltd.
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While SEBI maintains its focus on curbing speculative trading, market watchers expect the new mechanism to boost trading in options and futures. Analysts at Jefferies Financial Group Inc. predict a reduction in volatility on expiration days, benefiting brokers and potentially encouraging traders to resume disrupted strategies.
The change may also help proprietary trading desks manage expiry risk and increase transaction revenue for brokers and exchanges. Arbitrageurs could benefit from the return to the previous methodology, making hedging and arbitrage strategies easier to execute.
Eshaan Lazarus, founder and CEO of 021 Trade, noted that the closing auction session allowed participants with smaller book sizes to influence closing prices, particularly in thinly traded instruments. He believes the reversion to the earlier system will reduce such swings, making the process more predictable and attracting traders who previously stayed away.
