Sebi reintroduces VWAP for derivatives expiry after CAS turns markets volatile

The Securities and Exchange Board of India (Sebi) on Thursday pulled back the two-month-old closing auction framework for settlement of derivatives contracts, after it led to abrupt price swings and uncertainty on expiry days.In a late-night circular, the market regulator said that the closing price will be calculated based on a 30-minute volume-weighted average price (VWAP) on derivatives expiry days i.e. Tuesday and Thursday.Sebi reviewed the framework through a consultation paper in September, following pushback from market participants over a liquidity squeeze during the auction. The paper outlined two options for calculating closing prices on derivatives expiry days: adopt a blended VWAP-based methodology or retain the existing VWAP calculation based on the last 30 minutes of continuous trading on settlement days for at least a year.Unlike a simple average, VWAP takes into account both the price and volume of trades.

For instance, if 100 shares are traded at ₹10 each and 50 shares at ₹12 each, the WAP is ₹10.67, compared with a simple average price of ₹11. On the other hand, a CAS uses an auction to match orders and derive the closing price.Many market participants have urged Sebi to retain VWAP-based settlement pricing on expiry days-Tuesday for Nifty options and Thursday for Sensex options-and introduce blended pricing on non-expiry days for a year before transitioning fully to the blended framework.CAS, introduced in August, led to abrupt price swings on expiry day, making it difficult for traders to participate in the futures and options (F&O) segment.Initial operational challenges, including the need for market participants to modify their trading software and the early closure of the continuous trading session (CTS), have kept some participants, including arbitrage funds, away. Passive funds such as exchange-traded funds (ETFs) and index funds have been more active in the auction.Other developmentsFor the rest of the market, Sebi has reduced the transition period between continous trading (CTS) to CAS from five minutes to one minute.

CAS would now run from 3:30pm to 3:40 pm. Trading in index derivatives contracts would continue untill 3:45pm. On expiry day however, trading in index derivatives contracts will stop at 3:30pm.Unexecuted iceberg orders would now move to to CAS as limit orders, unless the trader opts out of it. This norm would come into effect from 8 February 2027 while the rest of the regulations would be implemented from 7 December.