Industry Odisha Bureau, Oct 15: The market regulator may blend continuous-trading VWAP with closing-auction prices. The aim is to curb expiry-day distortions. Thin auction liquidity has left derivatives settlement prices exposed to large orders.
India’s closing auction session was meant to deliver sturdier closing prices. Since its launch on 3 August, thin participation has blunted that promise.
Derivatives settlement prices now hinge on a relatively illiquid 10-minute auction. Large orders can move them sharply. On expiry days, derivatives and spot prices converge. That makes the closing price decisive for weekly and monthly options.
India’s market regulator, SEBI, is likely to adopt blended settlement pricing, three people said.
Under the proposal, settlement prices would draw on two sources. One is the volume-weighted average price (VWAP) from continuous trading. The other is the price discovered in the auction itself.
VWAP weights each trade by size as well as price. A hundred shares at ₹10 and fifty at ₹12 yield a VWAP near ₹10.67. A simple average would show ₹11.
Why the auction has struggled
Closing auctions are generally preferred over VWAP in major global markets. In India, volumes lag.
Shai Coelho, founder of Pune-based analytics firm Vtrender, puts NSE auction volumes at ₹1,000–1,200 crore. That is roughly a fifth of volumes in the old session’s final 15 minutes. Such thin turnover could skew options prices on settlement days, he said.
Operational hurdles, including software changes and an earlier cash-market close, deterred some players. Some arbitrage funds stayed away, while ETFs and index funds were more active.
Continuous trading once ran until 3:30 p.m. The cash session now stops at 3:15 p.m., before a 3:20–3:30 p.m. auction. Derivatives trade on until 3:40 p.m.
Two paths on the table
SEBI’s September consultation paper set out two alternatives. One was an immediate blended VWAP methodology. The other would retain VWAP-based settlement on expiry days for at least a year.
Many market participants want VWAP kept for Tuesday’s Nifty and Thursday’s Sensex options expiries. Blended pricing would cover other days for a year before a full switch. D.K. Aggarwal of SMC Capitals said participants expect auction liquidity to deepen over a year. He conceded that immediate blending could also correct expiry-day distortions.
One person doubted the regulator would accept two liquidity pools that leave auction volumes thin.
The blended methodology would cover 213 stocks, including Nifty and Sensex constituents. It would use combined VWAP across exchanges, based on actual traded value. Continuous trading would carry more weight than the auction. Reported VWAP windows include 2:45–3:15 p.m. or 3–3:30 p.m. Auction prices could come from 3:20–3:30 p.m. or 3:30–3:40 p.m.
SEBI also looks set to curb certain order cancellations. The auction’s price band is ±3% of a reference price. That reference uses trades from the final 15 minutes of continuous trading. Some participants placed limit orders near the band’s edges, then cancelled them. A proposed rule would restrict cancelling limit orders priced beyond ±1% of the reference. Such cancellations can jolt prices and have kept participants away, one person said.
Chairman Tuhin Kanta Pandey said on 10 October final guidelines were about a week away. Blended pricing will not erase expiry-day volatility. But it would ease reliance on one thin trading window. Deeper auction participation remains the real test.
