Sebi Revises Closing Auction Session Rules to Boost Expiry Day Trading

The Securities and Exchange Board of India (Sebi) has introduced significant modifications to the closing auction session (CAS) rules, effective from December 7, with the aim of restoring participation in the derivatives market, particularly on expiry days. Market analysts believe these changes could ease sharp price swings and encourage more active trading among brokers and institutional players.

One of the key amendments involves revising the settlement methodology for index derivatives on expiry days. Instead of the previous approach, the settlement price will now be calculated based on the volume-weighted average price (VWAP) of the constituent stocks during the last 30 minutes of the continuous trading session (CTS) in the equity cash segment. For stock derivatives nearing expiry, the settlement price will also be derived from the VWAP of the underlying shares over the same 30-minute window, aggregated across all stock exchanges.

In addition to the settlement price change, the timing of the CAS itself has been adjusted. The CAS will now operate as a distinct 10-minute session from 3:30 pm to 3:40 pm on all trading days. On regular days, index derivatives will continue trading until 3:45 pm; however, contracts expiring on that day will cease trading at 3:30 pm. Stock derivatives will maintain their usual trading hours until 3:45 pm, including on expiry days.

Jefferies, in a recent note, observed that these revisions are expected to mitigate the volatility typically seen on expiry days. The reduced price fluctuations during the CAS could particularly benefit brokers by keeping order volumes below the levels recorded prior to the CAS implementation. While there is an upside potential for exchange earnings, Jefferies cautioned that the recovery to pre-CAS premium turnover levels might limit substantial gains.

Since the CAS rules were first introduced on August 3, trading activity had initially declined, with average daily trading volumes (ADTV) in equity derivatives dropping to ₹347 trillion in August from ₹446 trillion in July. However, volumes showed signs of revival in September, climbing to ₹389 trillion, and surged further to ₹506 trillion in October. Analysts attribute the October increase partly to the higher number of weekly expiry days in the month.

Industry participants welcomed Sebi’s changes, noting that the regulator incorporated most of the suggestions received during the consultation process. Amit Chandra, Head of Equity Derivatives at HDFC Securities, explained that previously, the gap between the reference price and the settlement price on monthly expiry days was substantial, making it difficult for option writers and traders to hedge their positions effectively.

Chandra elaborated that traditional option decay strategies, which rely on options losing value as expiry approaches, were disrupted by the earlier CAS rules. The unpredictable price movements during the CAS discouraged high-frequency traders (HFTs) and large market participants from engaging fully, leading to diminished liquidity.

By returning to a VWAP-based settlement price and adjusting CAS timings, Sebi aims to reduce uncertainty and restore confidence among traders. These reforms are expected to align the derivatives market more closely with underlying equity price movements, supporting more effective hedging and risk management strategies.

The derivatives market in India plays a crucial role in price discovery and risk mitigation for investors and institutions. Expiry days can be particularly volatile due to contract settlements and position unwinding, so measures that stabilize trading behavior on these days are closely watched by market participants.

With these recent changes, Sebi appears to be responding to market feedback while attempting to balance the interests of retail investors, brokers, and large traders. The evolution of the CAS framework will likely remain a key focus as the regulator monitors its impact on market dynamics in the months ahead.