Sebi price band new rule to make stock market less volatile

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Sebi price band new rule: According to new changes made in the mechanism of levy of price bands on stock prices, the stock market is expected to become less volatile from June 3, 2024 onwards. This is because it is expected that the new mechanism has been designed in such a way, that, it will help reduce fluctuations in the prices of the stocks especially when market faces volatility.

Let’s see what changes Sebi has made:

The capital market regulator has made two changes in the current mechanism of levy of price bands on stock prices. One, the regulator has increased the cooling-off period. And second, it has reduced flexing of price bands. Let’s understand in detail what are these two factors:

Longer Cooling-Off Period: 

Currently, when market faces volatility, stock exchanges first levy 10 per cent price band on scrip prices. The price band is levied on the previous days’s closing price of the stock. Exchanges can levy price bands umpteen number of times during the course of the day, if necessary. After the exchange has levied the band for the first time during the day, if the stock continues to face volatility, then, again it can flex the price band by five per cent to reduce flucatuations. But the gap between the first and the second  time should be of 15 minutes. This is known as cooling-off period. The Sebi has increased this cooling off period to 30 minutes and even to 60 minutes in some cases. This will enable the exchange to manage volatility in the stock prices better than ever before.

b. Flexibility reduction:

Plus, the capital market regulator has also reduced flexing of the price band to three per cent and even to two per cent from current five per cent depending on the volatility. Due to longer cooling-off period, exchanges will have more time to wait before flexing the band again, and secondly, because the exchanges will only be able to flex the bands by a lesser margin than currently, these two changes combined will help reduce fluctuations in the stock prices because the stock price will remain intact within the price band for a longer time.

According to Sebi, these new changes in mechanism of levy of price bands  will reduce fluctuations in the stock market. The exchanges are being advised to  implement these two changes in a phased manner from June 3, 2024 onwards.