India's securities regulator is considering changes to the way stock derivatives settle on expiry days, after a newly introduced closing auction session was blamed for sharp, late-day price swings. The Securities and Exchange Board of India (SEBI) is weighing a partial or full return to volume-weighted average price (VWAP)-based settlement prices, according to people familiar with the matter.
What is the closing auction session?
The closing auction session (CAS) was introduced on August 3 for stocks that have futures and options contracts. Under this system, the final closing price of a stock is determined through an end-of-day auction, where buy and sell orders are matched over a 10-minute window. This replaces the old method, where the closing price was simply the last traded price of the regular session.
The idea behind the CAS was to make closing prices more transparent and less prone to manipulation, as the auction aggregates supply and demand at the end of the day. However, because many derivatives contracts—especially index and stock options—settle to that final closing price, the extra 10 minutes also made the finish line less predictable. Traders now have to guess where the auction will land, which can amplify volatility on expiry days.
Why expiry days have become jumpy
Expiry days are already among the most volatile sessions in any derivatives market. That's when options and futures contracts come due, and traders who hold positions must either close them out or let them settle. The new closing auction adds another layer of uncertainty: the final price is set in a compressed window, and large orders can move it significantly.
Recent expiry days have seen dramatic swings in the final minutes of trading, with some stocks and indices moving sharply in the auction. This has frustrated both retail and institutional investors, who find it harder to predict their settlement prices. The regulator's proposed tweak—returning to VWAP-based settlement—would use the average price of all trades during a period (often the last 30 minutes) rather than a single auction price. That would smooth out the impact of any one large trade.
What a VWAP-based settlement would mean
VWAP, or volume-weighted average price, is a common benchmark that accounts for both the price and the volume of trades. If SEBI moves to a partial or full VWAP-based settlement, the final settlement price for derivatives would be based on the average of trades over a set window, rather than the closing auction price alone.
This would likely reduce the incentive for traders to push prices in the final minutes, because a single large order would have less influence on the average. It could also make expiry-day trading less chaotic, as the settlement price would be more predictable. However, it might also reduce the precision of the closing price, which some market participants value.
What it means for investors
For everyday investors, the immediate takeaway is that expiry-day volatility could ease if the regulator follows through. That would make it easier to manage risk on days when options and futures expire, and reduce the chance of getting a nasty surprise in the final minutes of trading.
But it's not just about the mechanics. The move signals that SEBI is actively monitoring market structure and willing to adjust rules when they create unintended consequences. That's generally a positive for market stability, even if it means some traders will need to adapt their strategies.
Investors who trade options or hold positions through expiry should keep an eye on SEBI's next steps. Any change to settlement methodology could affect how they price their trades and manage their portfolios. For those who don't trade derivatives, the impact is indirect but still relevant: calmer expiry days mean less overall market turbulence, which can benefit long-term investors who prefer stability.
Broader context
This is not the first time SEBI has tinkered with market structure to address volatility. The regulator has been proactive in recent years, introducing measures to curb speculation and protect retail investors. The closing auction itself was part of that effort, and now the regulator is fine-tuning it based on real-world experience.
The move also comes amid a broader global conversation about how exchanges handle closing prices. Many markets use auctions or VWAP-based methods, and each has its trade-offs. SEBI's willingness to revisit its approach shows a data-driven mindset, which should reassure investors that the regulator is responsive to market conditions.
For now, the proposal is still under consideration, and no final decision has been made. But the fact that SEBI is openly weighing these options is a signal that change is likely. Investors would be wise to stay informed and adjust their expectations for expiry-day trading accordingly.
