SEBI proposes new mechanism to determine stock closing price
MUMBAI: Instead of the current method of determining the average closing price of a stock through the volume-weighted average price (VWAP), the markets watchdog Securities and Exchange Board of India (SEBI) has proposed an internationally followed practice of close-auction session (CAS) to determine the closing price of a stock.
In a statement issued on Thursday, the SEBI has proposed that CAS may be introduced as a call-auction mechanism to determine the closing price of each stock in the cash segment. CAS may be implemented as a separate session of 15 minutes from 15:30 pm.
The proposal comes with the increase in passive investing, the regulator is concerned that investors bear the brunt of any difference in index tracking, particularly on event days when there can be an increase in volatility.
During a call auction session, buyers and sellers quote their prices, which are then used to determine an equilibrium price and is set as the closing price of a security. The VWAP mechanism weighs the prices of a security during the last 30 minutes of the trading and is executed at each price in terms of the volume.
"While the VWAP mechanism facilitates determining a fair market closing price based on trading interest in stocks spread through the last half an hour of the trading, it does not enable interested buyers and sellers to trade exactly at the close price of the day,” says the SEBI paper.
According to the SEBI, since the closing price is determined by the last half an hour VWAP, some international passive fund houses have said the extant closing price mechanism can cause significant price volatility across stocks as well as have a high risk of large orders not being completed, which then adds to the tracking difference of a passive fund.
This is particularly significant during large event days, such as, on index rebalancing days and derivative expiry days.
SEBI in its statement suggests that CAS can be applied to stocks in a phased manner. To being with, it will be applicable to stocks with derivatives available, so as to ensure this is only offered on stocks on that have sufficient liquidity.
The SEBI also proposes its implementation into four sessions -- a reference price determination period, an order input period, a no-cancellation period including a random close of order entry followed with the final stage of trade confirmation and order matching.
To give a sense of continuity, the reference price will be determined through the VWAP mechanism, SEBI added.
Meanwhile, in another move, SEBI in a circular has asked i-bankers to upload pre-IPO, and post-IPO documents onto an online repository platform which will be maintained by exchanges.
Merchant bankers have been asked to upload due-diligence documents made for pre-IPO and post-IPO management onto an online repository maintained by stock exchanges. While these documents may be accessible only to the relevant merchant banker, they must be made available to the SEBI for supervision, according to the market regulator's circular issued Thursday.
The circular also asks stock exchanges to inform merchant bankers on the indicative list of documents to be uploaded which has been prepared in consultation with the Association of Investment Bankers of India and the process of uploading the documents in the document repository platform. Merchant bankers are to ensure that the documents are complete, relevant and legible.
"To facilitate efficient maintenance of records and documents relied on by merchant bankers while conducting their due diligence on public issues, stock exchanges have set up an online document repository platform which would enable merchant bankers to upload and maintain these documents electronically. The document repository is intended to facilitate easier access to documents pertaining to public issue processes which are required to be maintained by merchant bankers," the circular said.
