SEBI To Enforce Dynamic Price Bands For All F&O Stocks Equally On Exchanges

According to a recent report, the Securities and Exchange Board of India (SEBI) is looking at an idea that could require the implementation of dynamic price bands on all securities that are part of the F&O category.

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The proposed change would ensure that if a stock is part of the F&O segment on any one exchange, it will follow dynamic price bands on all exchanges, according to discussions with market participants.

Existing Framework And Identified Gap

At present, there is a difference in the price band system of derivative-contracted stocks, which have dynamic price bands or operating ranges, as compared to stocks that are not F&O, having fixed price bands with a cap of 20%.

While dynamic price bands provide for slow price changes along with cooling down periods, fixed price bands limit price changes within a certain range.

This disparity has emerged because of the differences in the derivative contract cycle of NSE and BSE. While NSE launches new series of its F&O products on Wednesdays, BSE launches theirs on Fridays.

Mismatch During Entry And Exit Phases

This disparity results in brief intervals wherein a security could be considered an F&O stock in one market but not in the other.

For instance, when a stock becomes part of the F&O category, it could change from fixed bands to dynamic bands at NSE starting Wednesday, but continue operating under fixed bands at BSE up to Friday. In cases where the roles are reversed, the inconsistency would occur between Friday and the coming Wednesday.

If, at any point, these securities were to move out of the F&O category, there might be an inconsistency as one exchange may decide to use fixed bands before the other exchange.

Implications for Trading and Price Discovery

This would then result in the same security being traded at two prices. The stock may be continuing to trade with an increased movement in one market due to its dynamic bands, whereas it might have moved beyond its upper or lower circuits in the other market, due to its fixed bands.

This could affect the ability to keep trading, find arbitrage opportunities, and find out what the price is when things are very volatile or when a company makes an announcement. The SEBI’s move intends to bring about consistency in such situations.

Next Steps

There have been consultations by the regulator with respect to this proposal. On completion of consultations, the SEBI will issue a circular defining the new framework.

The proposed change becomes all the more relevant against the backdrop of the introduction of the Closing Auction Session, whereby consistent price bands are needed for determining the close prices accurately.

This is in line with SEBI's overall strategy with regard to harmonization of trading systems among different market segments and exchanges.