SEBI Revises ETF Price Band and Pre-Open Auction Framework

SEBI has revised the framework governing Exchange-Traded Funds (ETFs) by introducing changes relating to base price determination, price bands, pre-open call auction sessions and the close-out procedure. The revised norms are aimed at improving price discovery, enhancing market efficiency and ensuring orderly trading in ETF units.

1. Revised Base Price Determination

Under the revised framework, the base price for calculating the applicable price band shall be the closing price of the previous trading day (T-1).

The closing price shall be determined based on:

• The Volume Weighted Average Price (VWAP) of trades executed during the last 30 minutes of trading; or
• The Last Traded Price (LTP) of the day, where no trades occur during the last 30 minutes.

This methodology is intended to ensure a more representative reference price for ETF trading.

2. New Price Band Framework

SEBI has prescribed an initial price band of:

±10% of the base price

for ETF units.

The price band is designed to contain excessive intraday volatility while facilitating orderly market operations.

3. Cooling-Off Mechanism for Price Band Expansion

Where necessary, the initial price band may be expanded through a structured cooling-off mechanism.

Under the revised framework:

• The price band may be widened by 5% at a time; and
• The maximum permissible price band shall be ±20%.

This mechanism seeks to balance market stability with efficient price discovery.

4. Changes in Pre-Open Call Auction and Close-Out Procedure

The circular also revises the norms relating to:

• Conduct of the pre-open call auction session; and
• The close-out procedure applicable to ETF transactions.

The changes are intended to streamline trading and settlement processes and improve operational consistency across exchanges.

5. Objective of the Revised Framework

The revised norms aim to:

• Strengthen price discovery mechanisms for ETFs;
• Introduce a uniform methodology for determining base prices;
• Improve market efficiency and liquidity;
• Manage volatility through a structured price band framework; and
• Enhance trading and settlement processes for ETF investors.

6. Key Takeaway

Under the revised framework, ETF price bands will be calculated using the T-1 closing price, determined on the basis of the last 30 minutes’ VWAP or the day’s LTP where no such trades occur. ETFs will initially be subject to a ±10% price band, which may be expanded in stages through a cooling-off mechanism up to a maximum of ±20%, thereby facilitating orderly price discovery and market stability.

Click Here To Read The Full Circular