Sebi proposes measures to contain price volatility on shares in derivative segment


NEW DELHI: Capital markets regulator Sebi on Sunday presented a proposal to strengthen the existing price band formulation for scrips in the derivatives segment to deepen volatility management and minimize information asymmetry in the market.
Price bands for scrip or derivatives contracts represent the limits within which competing orders from buyers and sellers for a day are accepted by the exchange’s trading system.
In the case of scrips with derivative contracts, these price ranges are dynamic and can be adjusted flexibly depending on the day-to-day trading.
In its consultation paper, Sebi has suggested that in the event that a share in the futures and options segment falls or rises by more than 20 percent per day, the cooling off period should be gradually extended, with the maximum cooling off period being one hour from the current 15 minutes .
Thereafter, such scrips should be allowed to move no more than 2 percent from the current limit of 5 percent. The proposals would provide a tool to control extreme market volatility and help contain the worst one-day price moves in the scrip, Sebi said.
The proposals came amid a massive sell-off in Adani Group shares after US investment firm Hindenburg raised concerns about the conglomerate’s governance in its January report.
According to the Hindenburg Report, the Adani Group, which denied any wrongdoing, lost more than $140 billion of its market value.
The Securities and Exchange Board of India (Sebi) has solicited public comment on the proposal as of June 5.
Based on the draft papers, the regulator said that the regulator has proposed to introduce a revised temporary cap in the options price band once the stock price touches the price band until the price band flexes after the last traded price (LTP) of the options contract.
In addition, given the exchange’s surveillance-related findings, Sebi has proposed setting daily hard limits on the scrips in the futures contracts and corresponding price limits in options contracts.
It has been suggested that the scrip and futures contracts should have a price range of, say, 10 percent at the start of the day.
However, these price bands would remain in place as fixed daily limits for the period set by the exchange. Accordingly, for such a period, there would be a daily hard band of, say, 10 percent, which could not be flexible throughout the day.
In addition, Sebi suggested increasing the existing requirements of a minimum number of 25 trades of five different Unique Client Codes (UCCs) on both sides, bearing in mind that too high a value could hamper the price discovery process.
In addition, additional conditions of a minimum number of trading participants on both sides of the trades of at least 9.9 can be added, for example 3 to 5 trading participants on both sides.

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