India’s battered equity-derivatives market is positioned to extend a nascent recovery after the nation’s securities regulator reversed a controversial pricing mechanism that had plunged trading activity into confusion.
The Securities and Exchange Board of India announced late Thursday that derivative settlements on expiration days will utilize the volume-weighted average prices of underlying stocks during the final 30 minutes of continuous trading. This decision overturns a key feature of the closing auction session introduced on August 3, which had triggered wild fluctuations in reference prices and disrupted standard market behavior.
The regulatory shift is expected to restore a measure of predictability that traders and brokers say was severely compromised under the auction system. Market participants noted that the previous mechanism created an environment prone to sudden price dislocations.
“Participants going ahead will have greater clarity and predictability around expiry settlement prices,” said Dhiraj Relli, managing director of HDFC Securities Ltd. “This should help restore trader confidence, reduce uncertainty-driven changes in trading behavior and potentially bring derivatives volumes closer to pre-CAS levels over time.”
The introduction of the closing auction session in August had immediate negative repercussions for liquidity and trading volumes. In the month the system was implemented, average daily turnover in equity derivatives dropped to an 18-month low on the National Stock Exchange of India Ltd., the country’s primary bourse. Turnover simultaneously fell by one-third on the smaller BSE Ltd. before experiencing a slight rebound in September.
While the regulatory authority maintains its broader policy stance aimed at curbing excessive speculation in the retail-heavy derivatives sector, market watchers anticipate that the latest adjustment will encourage renewed participation in options and futures.
Analysts at Jefferies Financial Group Inc. indicated in a Friday report that the change should temper expiration-day volatility. This stabilization is viewed as a positive development for retail brokers whose order volumes have continued to lag behind pre-auction levels. Following the announcement, Jefferies maintained its buy rating on Billionbrains Garage Ventures Ltd., the parent company operating India’s largest retail brokerage, Groww.
A more stable and predictable settlement structure is also expected to revive sophisticated trading strategies that were sidelined during the auction system’s tenure. Proprietary trading desks are anticipated to find risk management more manageable on expiry days, while exchanges and brokers could see a corresponding lift in transaction revenues.
Furthermore, arbitrageurs stand to benefit from the reinstated methodology, which market participants say will simplify the execution of complex hedging and arbitrage strategies. This improvement is particularly relevant for institutional and active traders managing substantial positions simultaneously across cash equities and derivative contracts.
Industry executives pointed to specific structural flaws in the auction system that necessitated the reversal. Eshaan Lazarus, founder and chief executive officer of brokerage 021 Trade, noted that the lower liquidity environment under the auction model allowed market participants with relatively smaller book sizes to exert disproportionate influence over closing prices, particularly in thinly traded instruments.
“Reverting to the earlier VWAP system will reduce the scope for such swings, making the process more predictable and potentially bringing back traders who stayed away due to concerns of unfair settlement prices,” Lazarus said.
Although the regulator continues to enforce strict oversight to rein in speculative excesses, the return to the volume-weighted average pricing mechanism removes a significant operational roadblock. Market participants now await the longer-term impact on trading volumes as confidence gradually returns to India’s major stock exchanges.
