The Securities and Exchange Board of India (Sebi) on Thursday pulled back the two-month-old closing auction framework for settlement of derivatives contracts, after it led to abrupt price swings and uncertainty on expiry days.
In a late-night circular, the market regulator said that the closing price will be calculated based on a 30-minute volume-weighted average price (VWAP) on derivatives expiry days i.e. Tuesday and Thursday.
Sebi reviewed the framework through a consultation paper in September, following pushback from market participants over a liquidity squeeze during the auction. The paper outlined two options for calculating closing prices on derivatives expiry days: adopt a blended VWAP-based methodology or retain the existing VWAP calculation based on the last 30 minutes of continuous trading on settlement days for at least a year.
Unlike a simple average, VWAP takes into account both the price and volume of trades. For instance, if 100 shares are traded at ₹10 each and 50 shares at ₹12 each, the WAP is ₹10.67, compared with a simple average price of ₹11. On the other hand, a CAS uses an auction to match orders and derive the closing price.
Many market participants have urged Sebi to retain VWAP-based settlement pricing on expiry days-Tuesday for Nifty options and Thursday for Sensex options-and introduce blended pricing on non-expiry days for a year before transitioning fully to the blended framework.