The Securities and Exchange Board of India (Sebi) has proposed a new mechanism for stock exchanges to decide the price band and base price for the pre-open call auction to address price distortions that may occur when a scrip trades on one exchange but remains inactive on another.
In a consultation paper issued on Thursday, the market regulator said differing closing prices across exchanges for thinly traded stocks can lead to significant price divergence over time, potentially impacting price discovery and even causing a stock to stop trading on one exchange.
To address this, Sebi has proposed that, where a stock trades on all exchanges or remains inactive across all exchanges, each bourse may continue using its latest closing price to determine the next day’s price band.
However, if trading takes place only on one exchange, the other exchanges would be required to adopt the closing price from the active exchange to set both the price band and the base price for the pre-open call auction the following day.
In cases where a stock trades on multiple exchanges but remains inactive on one or more, the exchanges without trades would use the closing price from the exchange with the highest trading volume for that stock.
In the current system, price bands, designed to curb excessive volatility in individual stocks, are set based on the previous day’s closing price for each exchange. While exchanges implement a uniform price band for stocks traded across exchanges, scrip-wise price bands are calculated independently using each stock’s closing price.
This approach can create issues in illiquid scrips, according to the regulator. If a stock fails to trade on one exchange for several sessions while having sustained buying interest on another, the exchange with no trades retains an older reference price. As a result, the permissible trading range continues to depend on a closing price that has not moved in several days, widening the gap between the stock’s quoted values across venues.
The regulator highlighted the divergence with an example: a stock with a common closing price of ₹100 on two exchanges gradually rises to ₹160 on one exchange over several trading sessions. The other exchange, where no trades occur, continues to apply a 20% price band around the original ₹100 reference price, leading to substantial divergence in trading ranges and closing prices.
Public comments on the proposals have been invited until 2 July.
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