The Securities and Exchange Board of India (Sebi) received over 20,000 comments on its consultation paper on the closing auction session (CAS), market timings and derivatives settlement methodology, with traders and market participants seeking continuation of the last 30-minute continuous trading session (CTS) volume-weighted average price (VWAP) method before any shift to a blended framework.
With the consultation now closed, Sebi is expected to examine the large volume of feedback before finalising the revised CAS framework.
The unusually high response comes as the market regulator reviews the CAS mechanism introduced for stocks with derivatives contracts from August 3, which also resulted in a sharp decline in trading volumes in futures and options (F&O). The market regulator’s review came after an uproar from the trading community. Further, the regulator also saw certain instances of alleged manipulation in the window.
Sebi’s consultation had proposed two alternatives for determining expiry-day settlement prices — a blended VWAP incorporating trades during the final 30 minutes of CTS and the 10-minute CAS, or continuation of the CTS-only VWAP for at least a year before considering a transition to the blended methodology.
Feedback from traders, brokers and other participants has favoured the latter approach, with participants arguing that the existing 30-minute VWAP is familiar, transparent and operationally well understood. They have also said retaining it temporarily would allow CAS to develop its own liquidity and price-discovery characteristics before its trades are incorporated into derivatives settlement.
The Futures Industry Association (FIA), a global body with members from exchanges, clearing firms and trading firms across countries, in its response to Sebi submitted on October 3, strongly disagreed with the immediate adoption of blended VWAP and backed CTS-VWAP as the interim methodology. It said the variable weights assigned to CTS and CAS would be known only after the auction, even though participants would have to execute the CTS portion beforehand.
“This difficulty in tracking the settlement price has direct consequences for participants seeking to maintain their total exposure through expiry. These include funds using index futures to hedge their portfolios, arbitrageurs whose derivatives positions are perfectly hedged with underlying stocks, and long-term investors who initially obtained exposure through derivatives for liquidity reasons,” it noted in its submissions to Sebi.
FIA also pointed to lower trading volumes observed during CAS and recommended that any future move to blended VWAP be conditional on a clearly defined liquidity trigger demonstrating that the auction has sufficient liquidity to be incorporated into derivatives settlement. It also called for further consultation with market participants before any change.
On market timings, FIA and several other traders have backed Sebi’s Option A — extending continuous trading in CAS stocks to 3:30 pm, followed by the auction, with derivatives trading until 3:45 pm. They note that the longer continuous session would support price discovery and align the derivatives close more closely with completion of the cash-market closing process.
FIA, however, opposed Sebi’s proposal to stop disseminating the indicative index value (IIV) during CAS. It said IIVs provide market participants with a real-time reference for understanding how closing prices are forming and can assist surveillance by allowing futures prices to be compared with the implied value of the underlying basket. Removing the information, it argued, could reduce transparency without necessarily addressing manipulation risks.
Sebi’s consultation also proposed allowing unexecuted Iceberg orders to enter CAS after being converted into fully displayed normal limit orders, and shortening the transition between continuous trading and CAS to up to one minute.
The regulator had also proposed prohibiting cancellation of limit orders placed beyond 1 per cent range of the reference price during CAS, while permitting only price-improving modifications to such orders.
