India's markets regulator, the Securities and Exchange Board of India (SEBI), is planning to stop using its newly introduced end-of-day closing auction to determine settlement prices for derivatives, according to two sources familiar with the matter. The move comes after the auction appeared to amplify price swings on expiry days, the sources told Reuters.
Instead, SEBI intends to switch to a 30-minute volume-weighted average price (VWAP) for settling futures and options contracts, and will pause the auction-based method for at least a year. The change is aimed at reducing volatility and making settlement prices more stable and representative of actual trading activity.
What is the closing auction and why did it cause problems?
Last month, SEBI introduced a closing auction session for stocks that have linked futures and options. In a closing auction, buy and sell orders are matched at a single price at the end of the trading day, which is then used as the official closing price and, importantly, as the settlement price for cash-settled derivatives.
The idea was to provide a more transparent and efficient way to determine closing prices, rather than relying on the last few trades of the day, which can be sporadic or manipulated. However, a single auction print can be sensitive: if liquidity is thin or large hedging orders hit at once on expiry day, that one price can jump sharply. Since futures and options are cash-settled against this price, even a brief imbalance can cause significant mark-to-market moves for traders and investors.
By switching to a 30-minute VWAP, SEBI aims to smooth out these spikes. A VWAP is calculated by taking the average price of all trades during a period, weighted by the volume of each trade. This gives a more representative price than a single auction print, because it reflects the full range of trading activity over half an hour, not just one moment.
What does this mean for investors?
For everyday investors, the change is largely a technical one, but it has practical implications. If you hold futures or options that expire on a given day, the settlement price determines your profit or loss. A more stable settlement price means less uncertainty about what your final payout will be, especially on days when the market is choppy.
The move could also reduce the risk of sudden, unexplained jumps in the prices of stocks with derivatives, which can be unsettling for long-term investors who hold those shares. By making the settlement process less prone to distortion, SEBI is trying to protect the integrity of the market and ensure that prices reflect genuine supply and demand.
That said, the pause is not a permanent reversal. SEBI is likely to review the auction mechanism after the year-long trial period and may reintroduce it with adjustments. For now, traders and investors should expect a period of relative calm on expiry days, as the new VWAP method takes over.
Broader context: India's markets in focus
The decision comes at a time when Indian markets have been under pressure. Indian stocks recently snapped an eight-week losing streak, and the benchmark indices have seen heightened volatility amid global and domestic headwinds. The recent rebound in Indian stocks has been helped by easing oil prices and US economic data, but the market remains sensitive to sudden moves.
SEBI's regulatory tweaks are part of a broader effort to strengthen market infrastructure. The regulator has been proactive in addressing issues that could undermine investor confidence, from tightening rules on derivatives trading to improving price discovery mechanisms. This latest move is a recognition that even well-intentioned changes can have unintended consequences, and that flexibility is key.
For investors, the takeaway is that regulators are watching closely and are willing to adjust course when needed. That is generally a positive sign for market stability, even if it means some short-term uncertainty while the new rules are implemented.
What to watch next
Investors will be watching how the VWAP method performs in practice, particularly on the next few expiry days. If it succeeds in reducing volatility, it could become a permanent feature. If not, SEBI may need to revisit its approach.
Also worth monitoring is the broader trend of rising hedging activity in Indian markets, as companies and investors brace for more currency and equity volatility. The settlement price mechanism is just one piece of the puzzle, but it plays a crucial role in how derivatives are priced and settled.
For now, the message from SEBI is clear: stability matters. By pausing the auction and switching to a more robust average price, the regulator is aiming to make expiry days less stressful for everyone involved.
