Sebi Closing Auction Mechanism Cuts Indian Derivatives Volumes and Broker Revenues

India’s Securities and Exchange Board of India (Sebi) introduced a new closing-price mechanism on 3 August, triggering a steep decline in derivatives trading activity. The closing auction session (CAS) has wiped out approximately half of the trading volume and value in Bank Nifty futures since its debut.

As of 31 August, Bank Nifty futures volumes fell 41 percent to 14,484 contracts, with traded value declining by a similar margin to ₹2,512.95 crore. Nifty futures volumes also contracted, dropping 8 percent to 51,118 contracts and seeing a 9 percent decrease in traded value to ₹8,056.79 crore.

This contraction poses a direct threat to stockbrokers, whose income is heavily tied to trading activity. Nilesh Sharma, executive director and president at Samco Securities, estimates that brokerage revenues could decline by 15 to 20 percent due to the lower futures and options volumes.

Sandeep Chordia, chief operating officer at Kotak Securities, noted that firms with a larger derivatives mix are already seeing a revenue hit of about 10 percent. To cushion the blow, brokerages may pivot toward margin trading facilities or the distribution of wealth products like mutual funds.

The implications extend well beyond brokerage balance sheets. Futures and options markets are critical for providing liquidity and aiding price discovery across the broader financial system. Raj Shah, executive director at EPP Securities, warned that a sustained decline in volumes could reduce liquidity and negatively impact the overall market ecosystem.

The CAS replaces the final volume-weighted average price with a single equilibrium-price auction for 213 derivative-traded stocks. Regular cash-market trading ends at 3:15pm, followed by an auction that closes randomly between 3:28pm and 3:30pm, with order matching concluding at 3:35pm.

However, the transition has introduced sharp, unpredictable price movements. On 26 August, the Nifty slumped 271.4 points within 30 seconds of the 3:20pm auction open, a move attributed to a bid placed 3 percent below Bharti Airtel's reference rate. A similar divergence occurred on 3 August, when the Nifty surged 1.6 percent against a 0.7 percent gain in the Sensex during the final minutes of order closing.

This unpredictability has dampened incentives for derivatives trading across the board. Nifty 50 weekly index options have also seen reduced participation, with call-option purchases falling 16 percent to 151.9 million contracts on 4 August from 180.6 million on 28 July, while put-option purchases declined 10 percent.

A former regulatory official noted that Sebi did not anticipate such a significant impact on the derivatives market, though the regulator initially sought to curb excessive same-day trading volumes. The official expects the mechanism to decrease volatility over time, citing its successful implementation in other global markets.

Sebi did not respond to queries regarding potential adjustments to the system. Market participants now expect a further reduction in futures and options volumes, forcing the industry to adjust to a structurally different level of trading activity.