SEBI’s advisory committee favoured keeping the current 30-minute VWAP method for expiry settlement prices. The panel rejected an immediate shift to a blended formula using closing auction session prices. They also suggested extending derivatives trading until 3:45 pm. These changes aim to keep market schedules simple for many active traders.

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Market regulator Securities and Exchange Board of India's (SEBI) Secondary Market Advisory Committee (SMAC) has favoured retaining the existing volume-weighted average price (VWAP) methodology for determining the settlement price of index and stock derivatives on expiry days, rejecting an immediate shift to a blended formula incorporating closing auction session (CAS) prices, three sources told Moneycontrol.

30 Minute VWAP for settlement price

Under Option 2 of SEBI's September 12 consultation paper, the settlement price will be calculated using the VWAP of trades executed between 3 pm and 3:30 pm during the continuous trading session (CTS). The panel has favoured retaining this arrangement for at least a year before the regulator considers a transition to a new methodology, sources said.

The recommendation follows feedback from market participants after CAS was introduced for stocks in the futures and options (F&O) segment on August 3. The mechanism replaced the earlier closing-price process with an auction-based system, prompting concerns over price volatility and the impact of auction-derived prices on derivatives settlement.

SEBI's consultation paper had offered two alternatives: a blended VWAP incorporating trades during the final 30 minutes of continuous trading and the 10-minute auction, or retaining the CTS-only VWAP as an interim arrangement.

Market timings, F&O till 3:45 PM

The committee has also favoured a revised market schedule under which normal trading in CAS stocks will continue until 3:30 pm. Following a one-minute transition period, the closing auction will run from 3:31 pm to 3:40 pm. Derivatives trading will also be permitted until 3:45 pm, giving the segment a five-minute window after the conclusion of CAS, sources said.

The proposed schedule extends continuous trading in CAS stocks until 3:30 pm and reduces the gap before the auction begins. It is intended to provide a more straightforward transition between regular trading and the closing auction, while aligning the cash and derivatives market schedules.

IEP display likely to continue

The committee has also favoured continuing the display of the indicative equilibrium price (IEP) during CAS, sources said. SEBI's consultation paper had sought market feedback on whether the indicative index value derived from IEPs should be disseminated during the auction, given concerns that it could be mistaken for an actual index level and influence trading decisions.

The distinction between the security-level IEP and the indicative index value is important. The former indicates the price at which buy and sell orders in an individual stock could potentially match during the auction. The latter is an indicative calculation for the index and does not represents executed trades.

Market orders remain under review

The treatment of market orders remains unresolved, with SEBI expected to undertake further work on the issue. Market participants have raised concerns that market orders could pose a risk of price manipulation during the auction. As manipulators can put large orders during the CAS and then cancel, which may affect the IEP. The regulator is examining how such risks can be addressed.

Iceberg orders: Two validity options

On iceberg orders, the committee has favoured giving traders the option of placing orders valid until either 3:30 pm or 3:40 pm. If an iceberg order is valid until 3:40 pm, its entire quantity will be visible to the market during CAS. Iceberg orders allow traders to place large orders while displaying only a portion of the total quantity at a time.

SEBI's consultation paper had proposed that unexecuted quantities remaining at the end of continuous trading could be converted into normal limit orders for the closing auction, with the full quantity disclosed in the CAS order book.

The proposed arrangement addresses operational concerns around the treatment of large orders as the market transitions from continuous trading to the auction.

The committee's recommendations are expected to form part of SEBI's forthcoming circular on the CAS framework, which may be issued soon.