Sebi enhances dynamic-price band setting to protect against sudden price moves

Under the new norms, more trades from more diverse users will need to be taken for the 'flexing' (or stretching) of price bands.

For better protection against sudden price-movements or fat-finger errors, the market regulator has improved the way in which dynamic price bands for stocks in the derivatives segment are set. This change is also expected to enhance risk-management systems and minimise information asymmetry for market participants, among other things.

Dynamic price bands have been set for securities that have derivatives products, versus defined price bands for securities that do not have derivatives products. Dynamic price bands start at 10 percent of the previous day's closing price of the scrip or contract.

The new norms were issued by the Securities and Exchange Board of India (Sebi) on May 24.

Also read: Sebi releases norms for sharing of real-time price data with third parties

Under the new norms, more trades from more diverse users will need to be taken for the 'flexing' (or stretching) of price bands.

Until now, flexing would be done only if there were 25 trades with minimum 5 different unique client codes (UCCs) on each side of the trade at or above 9.90 percent and so on. Under the new norms, for flexing, a minimum of 50 trades from 10 UCCs and three members need to be taken on each side.

Better risk management

The new norms will also allow more nuanced flexing of price bands.

Until now, the price bands were flexed by 5 percent of the previous day's closing price during the day as many times as required, after allowing for 15 minute cooling periods, subject to conditions.

Under the new norms, the first two instances of flexing would be done by 5 percent of previous day's closing price after the cooling period. In this case, the cooling period will be 15 minutes if it is before the last half hour of trading and 5 minutes if it is in the last half of trading.

For the next two instances of flexing, the band would be flexed by 3 percent of previous day's closing price after a cooling off period of 30 minutes. For the next two instances of flexing, the band would be flexed by 2 percent of previous day's closing price after a cooling period of 60 minutes.

This has been introduced to strengthen the volatility/risk management process and to minimise information asymmetry, according to the circular.

"As scrip price keeps trending in one direction, it is required to provide adequate time to market participants to assimilate any company / market specific news flow thereby resulting in orderly price movement while reducing strain on settlement systems on account of extreme price movements in one direction."

Other changes

Other changes include exchanges having to ensure that, once conditions for flexing are fulfilled, the price band is flexed for the scrip and all the futures contracts on this scrip across all exchanges at the end of subsequent cooling off period. The new norms also say that, whenever price band of a scrip or futures contracts is flexed in one direction, the price band on the other side would be flexed concurrently by equivalent amount in the direction of price movement.