SEBI announces new framework for equity market: What's new?
What's the story
The Securities and Exchange Board of India (SEBI) has announced a new framework for determining closing prices in the equity cash segment. The move, which will be implemented in phases, is aimed at making the process more transparent and robust. Currently, closing prices are determined using the volume-weighted average price (VWAP) of trades executed between 3:00pm and 3:30pm during continuous trading.
Auction approach
New auction mechanism to determine closing prices
The new framework will see SEBI adopt an auction mechanism for closing price determination. This is in line with global practices and aims to pool market interest into a single liquidity pool. The move is expected to improve execution efficiency for large orders, ensure a fair settlement of derivatives and indices, and allow passive funds to transact at closing prices with lower tracking errors.
Auction session
CAS will run for 20 minutes daily
The Closing Auction Session (CAS) will run for 20 minutes daily, from 3:15pm to 3:35pm. It will be a separate session after the continuous trading session and include phases for transition from continuous trading, order entry for both market and limit orders. The equity derivatives segment will trade till 3:40pm while the post-close session in cash market will run from 3:50pm to 4:00pm with trades executed at closing price.
Reference pricing
CAS reference price based on VWAP of trades
The reference price for CAS will be based on the VWAP of trades between 3:00pm and 3:15pm. If there are no trades during this period, the last traded price of the day will be used. If there are none, the previous trading day's closing price will apply. A price band of plus or minus 3% of the reference price will apply during CAS.
Price determination
CAS to determine equilibrium price for maximum volume
All eligible orders during CAS will be used to determine an equilibrium price, which is the price at which the maximum executable volume is reached. If multiple prices qualify, the one with least unmatched quantity shall be chosen; if ambiguity persists, the one closest to the reference price will be selected. If no equilibrium price emerges, the reference price itself will be taken as closing price.
Settlement changes
SEBI revises framework for settlement prices of derivatives
With the change in closing price methodology, SEBI has also revised the framework for settlement prices of stock and index derivatives. These will now be based on closing prices discovered through CAS. The regulator has asked stock exchanges and clearing corporations, to jointly formulate standard operating procedures for the settlement prices and price-band alignment within 30 days.