Capital market regulator Securities Exchange Board of India (SEBI) has proposed key moves to stop manipulation in the equity derivatives, or the futures and options (F&O), market. It plans to monitor open interest (OI) four times a day, as opposed to once a day right now. Increased monitoring would help the market regulator actively spot the risk and manipulation, if any. That’s only one of the many changes proposed.

SEBI also wants to change how risk is measured, the limit for an F&O ban, introduce new trading sessions for better price discovery, and tighten rules for non-benchmark index derivatives. Let’s take a look at each proposal and how it could affect your trading life.

New method for Open Interest (OI) calculation

What is Open interest (OI)? It is a measure of market liquidity or, simply put, the amount of bets (number of active contracts) traders have made on a particular stock in futures and options market.

SEBI wants to shift from a notional OI system to a Future Equivalent (Delta-based) approach. A notional OI calculation gives equal weight to all contracts that being bought or sold. However, a delta-based approach would give lower weight to option contracts  that are far from the current market price.

The notional system may allow traders to artificially inflate OI, and therefore, signal more number of bets, one way or another, especially by using deep out-of-the-money (OTM) options that contribute little to actual market risk. ‘Out of the money’ describes contracts that are far from the current market price.

Under the new method, only the actual price sensitivity of options will matter.

Lower open interest limits: SEBI proposes bring down the position limits for index derivatives.

When the open interest crosses a specified threshold, which is different for each derivative based on free float and market capitalisation of the underlying stock/index, exchanges are supposed to ban trading on the particular on an index future or option.

However, just a few large traders can trigger this ban by making a few large bets, especially, in the options segment.

By lowering the limit triggering the ban, SEBI wants to avoid suspension of new trades and reducing the influence of a few traders trying to manipulate the market.

Additionally, the revised OI calculation method will make it harder to push stocks into a ban period. Today, a stock enters a ban when combined OI crosses 95%

of the Market-Wide Position Limit (MWPL).

The new system will count only the effective exposure, meaning stocks will be banned only when there is genuine risk buildup rather than artificial positioning.

More market-wide participation

SEBI wants more traders to participate in the derivatives market without unfair restrictions.

By reducing artificial ban periods, the new system could create a fairer playing field, SEBI believes.

New trading sessions for derivatives

SEBI is also exploring the introduction of pre-open and post-closing sessions for derivatives trading. Currently, derivatives trade only during regular market hours.

Extending sessions could improve price discovery and reduce volatility.

The impact

The current OI calculation method allows traders to manipulate stock prices.

SEBI’s changes aim to make derivatives trading more transparent and reduce sudden market disruptions.

SEBI has invited feedback on these proposals before finalising the new rules.

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