SEBI’s expiry-day reforms to address volatility, manipulation, claim experts

Market experts have backed SEBI’S proposed overhaul of the expiry-day trading framework, saying the changes could address key sources of volatility and manipulation in the closing auction while making the settlement process simpler and more transparent.

The comments come after market regulator SEBI floated a consultation paper on Saturday proposing changes to the Closing Auction Session (CAS), market timings and settlement methodologies for derivative contracts.
The proposals include delinking derivatives settlement prices from the cash-market closing price, discontinuing live indicative index values during the CAS and making orders placed beyond the one per cent band more binding.
Feroze Azeez, Joint CEO at Anand Rathi Wealth Ltd, said SEBI has addressed three major issues -- the relationship between cash-market closing prices and derivatives settlement prices, distortions caused by indicative auction prices, and order cancellations during the auction process.

“The most important development is that a derivatives contract need not be settled at exactly the cash-market closing price. SEBI has recognised that the cash and derivatives markets serve different purposes,” Azeez said.
He also said discontinuing dissemination of indicative index values during the closing auction would curb volatility created by unexecuted orders, while making aggressive orders beyond one per cent more binding would reduce the scope for manipulation through order cancellations.

Besides, he termed other proposals -- including allowing iceberg orders in CAS, shortening the transition period and reducing the post-CAS derivatives trading window to five minutes -- as sensible refinements.
Azeez said SEBI’S willingness to revisit the framework within weeks of implementation reflects an effective approach to market-structure reforms through implementation, observation and refinement. He said a blended VWAP combining continuous trading and the closing auction would add unnecessary complexity by making settlement dependent on two different trading mechanisms.

Rajesh Singla, CEO and Fund Manager at Alpha AMC, said the closing auction was conceptually sound but its implementation exposed gaps, particularly in thinner counters where concentrated price discovery amplified expiry-day volatility.

He said the solution should go beyond timing changes and include mid-session auction-price disclosures, incentives for market makers and phased implementation across different market-cap segments.

Meanwhile, Trivesh Dinesh, COO at Tradejini, favoured Sebi’s second proposal of determining expiry-day settlement prices based on the volume-weighted average price (VWAP) during the last 30 minutes of continuous trading, saying it is a simpler and more established methodology.

“The objective should be to have a settlement methodology that is transparent, easy to understand, and consistent for all market participants,” Dinesh said.
He also supported SEBI’S proposal to let regular trading continue until 3.30 pm before the closing auction begins, saying it would create a more intuitive market structure.
On the proposal to stop publishing live indicative index values during the closing auction, Dinesh said the move would help avoid unnecessary volatility and confusion, while retaining indicative prices at the individual security level would continue to aid auction participants.

SEBI’S proposals followed feedback received from market participants on the use of the CAS-determined closing price for settling derivative contracts on expiry.
Determination of derivative settlement prices based on the closing price arrived at through CAS was among the significant areas of feedback received by SEBI.

CAS was introduced in the equity cash segment for stocks having derivative contracts from August 3 with the objective of facilitating efficient and transparent price discovery of closing prices.
Before CAS, closing prices were determined using the VWAP of trades executed during the last 30 minutes of CTS. Under CAS, the closing price is determined through an equilibrium price discovery mechanism based on aggregate buy and sell orders in the auction.