The Securities and Exchange Board of India (Sebi) announced on Friday an updated framework for dynamic price bands for scrips in the derivatives segment. This modification aims to bolster volatility management and reduce information asymmetry in the market.
Current Mechanism and Changes
Previously, stock exchanges applied a mechanism of dynamic price bands, also known as operating ranges, for scrips that were excluded from standard price bands. Under this system, both cash market and futures contracts started with a price band set at 10 percent of the previous day’s closing price. This band could be adjusted by an additional 5 percent during the trading day if there were at least 25 trades involving 5 unique client codes (UCCs) on each side at or above a 9.90 percent price movement. Each adjustment was followed by a 15-minute cooling-off period during which trading continued within the current band.
Based on market feedback, Sebi has now revised these guidelines to enhance the conditions for adjusting price bands. The new rules stipulate that adjustments will require 50 trades, 10 unique UCCs, and 3 trading members on each side. This change aims to ensure a more robust verification process before any adjustments are made.
New Adjustment Rules
When the conditions for adjusting price bands are met in either the cash market or the current month’s futures contracts on any exchange, the price band will be adjusted for the scrip and all its futures contracts across all exchanges following a cooling-off period. The adjustments will be applied as follows:
- First Two Adjustments:
- Price band flexed by 5 percent after a 15-minute cooling-off period (reduced to 5 minutes if within the last half hour of trading).
- Next Two Adjustments:
- Price band flexed by 3 percent after a 30-minute cooling-off period.
- Further Adjustments:
- Price band flexed by 2 percent after a 60-minute cooling-off period.
Additionally, when a price band is adjusted in one direction, the band on the opposite side will also be adjusted, and orders outside the new price band will be cancelled. This measure is designed to reduce volatility and allow market participants to place orders closer to the current market price.
Impact on Options Trading
During the cooling-off period, a temporary price floor or ceiling will be applied to options contracts, linked to the last traded or theoretical price. This allows traders to hedge or close positions effectively. Once the underlying scrip’s price band is flexed, the options’ price band will also be adjusted accordingly.
Implementation
The updated circular will be implemented by stock exchanges in a phased manner starting from June 3. Stock exchanges are also required to notify trading members and clients about cancelled orders and ensure compliance with these new rules.
This regulatory update by Sebi is part of ongoing efforts to improve market stability and protect investors by ensuring that price movements in the derivatives segment are more controlled and transparent.
