SEBI logs 20,000 replies on closing auctions as sources say derivatives may switch to VWAP

The Securities and Exchange Board of India said over the weekend that it had received 20,000 suggestions on a consultation paper about how closing prices are set. On Monday Reuters reported, from two sources with direct knowledge, that the regulator is likely to stop using closing auctions to set derivatives settlement prices for at least a year. The replacement those sources described is the volume-weighted average price of the last 30 minutes of trading. A closing auction would remain for less liquid stocks in the cash market. SEBI has not published that split as a decision.

The distinction between what SEBI has said and what the sources described is the whole story. The public fact is the 20,000 figure, posted by the regulator on X, in reply to a paper issued last month. The reported fact is a partial reversal: auctions out of the derivatives settlement, auctions kept for thinner cash names, a VWAP window of 30 minutes for the contracts. Business Standard, citing the same Reuters account, said the changes were expected by the end of this month. Until a circular appears on SEBI's site, the end-of-month line is a timetable from sources, not a board minute.

The auction was introduced to look like the close used in the United States and Hong Kong. A short auction at the end of the day concentrates liquidity and produces a single print. On expiry days in India that print has moved derivatives prices sharply, which is why the consultation drew 20,000 replies. A consultation of that size is not a retail letter-writing campaign in the ordinary sense. Brokers, funds and proprietary desks all have a P&L interest in the expiry print. Twenty thousand suggestions means the paper touched working orders, not only policy opinion.

VWAP over the last 30 minutes is a different machine. It averages traded price by volume across a half hour, so a single auction order cannot set the settlement by itself. It also means the settlement can be gamed across the window rather than in a five-minute call. That is the trade the sources say SEBI is ready to make for derivatives: less spike risk on the print, more scope for activity through the half hour. Keeping the auction for less liquid cash stocks admits the other problem. A thin stock does not have 30 minutes of real volume. An average of a thin tape is not a price. An auction, whatever its faults on a liquid expiry, is one of the few ways to discover a close when the book is empty.

The year-long pause, if the sources are right, is the part with a date attached. A permanent rule would need a fresh circular and, on SEBI's recent practice, another round of comment. A one-year switch to VWAP for derivatives settlement is a trial. It lets the regulator watch expiry days under the old average and decide whether the spikes were an auction artefact. Traders who built expiry strategies around the call auction will have to unwind them if the circular matches the leak. Traders who wanted the average back will have what they asked for, on the contracts, and not on the thin cash names.

Mumbai's derivatives market is large enough that the settlement rule is not a back-office detail. Index and stock options expire on set days. The closing print is the number those contracts cash against. A change from auction to 30-minute VWAP moves the hedge, the margin and the last-hour volume. The 20,000 suggestions are a measure of how many desks noticed. They are not a vote. SEBI does not count consultation replies as ballots. It does, by posting the number, accept that the paper landed.

What a reader can use before the circular is the split the sources described, held as a report rather than as law. Derivatives settlement: likely the last 30 minutes' VWAP, for at least a year. Less liquid cash stocks: auction stays. Public anchor: 20,000 suggestions, from SEBI's own post. Clock: sources say by the end of October. The circular, when it comes, will either match that split or show that the leak was early. Until it comes, expiry desks have a reported rule and no new page in the master circular.