MC EXCLUSIVE Sebi working group proposes broader price band, higher order size for block deals

Block Deals makeover, working group suggests broader price band, higher order size.

A working group of market watchdog Sebi - reviewing the mechanism for executing block deals - has suggested a broader range for the reference price in large trades, along with a proposal to separate price range for morning and afternoon trade windows, Moneycontrol has learnt from people familiar with the development.

Block deals are pre-negotiated trades executed between parties on the exchange.

Broader Price Range of 5 Percent

According to sources, the majority view within the working group is that there should be a price range of 5 percent in both directions for the morning window and 3 percent for the afternoon window, for executing block trades. However, BSE has suggested a common price range of 2 percent on either side for both morning and afternoon block deal windows. Sources said BSE argued that a price range of more than 2 percent could impact liquidity in the continuous trading session.

The existing price band for block deals is one percent, which market participants find too narrow and impractical. BSE noted that the market volatility has increased and a bulk deal executed away from the current market price during the regular market window could trigger stop losses for orders.

One industry source said the narrow band for blocks only benefits traders. “Though the intention behind a narrow price range is to benefit retail investors, in reality, it is high-frequency traders who are benefiting, while long-term genuine institutional investors such as mutual funds - custodians of retail investors - at a disadvantage.”

Another market participant said, “Block deals happen in stocks that are not very liquid relative to the size of the deal. Such large blocks, when moved to the open market, result in higher impact costs due to greater slippage.”

Regulator Sebi will take the final call on the price ranges suggested by the working group.

No Additional Window

Sources said the majority view in the expert working group was that no additional window is required for block deals. Currently, block deal windows open twice, from 8:45 to 9:00 am and from 2:05 to 2:20 pm. The rationale was that the majority of trades occur in the first window, so the existing two-window system is appropriate and should not be altered. The discussions on the closing auction mechanism are still ongoing, said sources, making changes to the existing windows premature.

One mutual fund participant suggested introducing hourly windows of 10 minutes for block deals. The rationale was that this would allow market participants to trade in blocks based on near real-time reference prices. For comparison, the Shanghai stock market has three block deal windows, including one for fixed-price orders. Taiwan has a single half-hour window, and South Korea has a single one-hour block deal window.

Common Reference Price for Block Deal Windows

The Sebi working group unanimously suggested a common reference price for the morning and afternoon windows. Currently, the morning window’s reference price (8:45–9:00 am) is based on the volume-weighted average price (VWAP) of the last half hour of trades from the previous day’s close. The afternoon window’s reference price (2:05–2:20 pm) uses the VWAP of trades executed in the stock between 1:45 pm and 2:00 pm.

Minimum Order Size May Rise

The working group has also suggested at increasing the minimum order size for block deals to Rs 25 crore from the current Rs 10 crore. The rationale for higher block size is that benchmark indices have grown nearly 2.7 times over the last 10 years, and with the growth in size and depth of the market, it is natural to raise the current limit, which was set in 2017. There is also a view that raising the size limit would ensure participation mainly from serious institutional investors, not high-networth individuals or family offices, who bypass the main market via block deals.

The working group submitted its report to Sebi last week, and the regulator will take a final call on these recommendations. Moneycontrol had reported in May that Sebi has formed a working group to review the existing block deal mechanism.

An email seeking response from Sebi did not elicit any response.

Also Read: Sebi bars mutual funds from paying transaction charges to distributors

Block deals are used primarily by institutional investors such as mutual funds and insurance companies to execute large trades without disturbing the market price. The mechanism allows pre-negotiated deals between parties to be executed on the exchange within designated windows and under strict rules to prevent price manipulation.

Why the need for review was felt?

Institutional investors, have been expressing difficulty in acquiring sufficient shares within the existing tight one percent band, and also, there have been concerns around possible manipulation due to leaks about information of such deals. Keeping in mind these concerns Sebi had formed a working group in April this year, comprising participants from exchanges, mutual funds, broking firms, clearing corporations and other participants to review the block deal related framework. If the recommendations of the working group are accepted, then institutional investors may benefit from it.