Description
SEBI introduces Closing Auction Session (CAS) for derivative stocks in equity cash segment from 3:15 PM to 3:35 PM, replacing VWAP-based closing price determination with auction-based mechanism.
Summary
SEBI has mandated the introduction of Closing Auction Session (CAS) in the equity cash segment to determine closing prices for stocks on which derivative contracts are available. The CAS will operate from 3:15 PM to 3:35 PM as a separate 20-minute session, replacing the current Volume Weighted Average Price (VWAP) method based on last 30 minutes of trading. This change aligns Indian markets with global practices and aims to provide fair, transparent closing prices for derivatives settlement, index computation, and mutual fund NAV determination.
Key Points
- CAS introduced as separate 20-minute session from 3:15 PM to 3:35 PM on all trading days
- Initially applicable only to stocks on which derivative contracts are available
- Remaining securities will continue using VWAP of last 30 minutes of Continuous Trading Session
- Order entry session closes randomly between 3:28 PM to 3:30 PM (system-driven)
- Equity derivatives segment continues to operate until 3:40 PM
- Post-close session operates 3:50 PM to 4:00 PM for trades at closing price
- Session structure: 5 min transition + 5 min order entry (limit & market) + 5 min order entry (limit only) with random close + 5 min matching
- Market orders cannot be modified/cancelled in last 5 minutes before random close
- Benefits include aggregated liquidity, fair price discovery, reduced tracking error for passive funds
Regulatory Changes
Closing Price Determination Method:
- Current: VWAP of trades in last 30 minutes of Continuous Trading Session
- New (for derivative stocks): Price discovered through Closing Auction Session
Trading Session Structure:
- Continuous Trading Session: Ends at 3:15 PM (previously 3:30 PM)
- New CAS Session: 3:15 PM to 3:35 PM (20 minutes)
- Equity Derivatives: Continues until 3:40 PM (no change)
- Post-Close Session: 3:50 PM to 4:00 PM (adjusted timing)
CAS Session Phases:
- Reference price calculation/Transition (3:15 PM - 5 minutes)
- Order entry - limit and market orders (3:20 PM - 5 minutes)
- Order entry - limit orders only, no modification/cancellation of market orders, random close in last 2 minutes (3:25 PM - 5 minutes)
- Order matching (3:30 PM - 5 minutes)
Phased Implementation:
- Phase 1: Stocks with derivative contracts
- Future phases: Remaining securities (timeline not specified)
Compliance Requirements
Stock Exchanges Must:
- Implement CAS infrastructure and systems for 3:15 PM to 3:35 PM session
- Configure random closure mechanism between 3:28 PM to 3:30 PM
- Support both limit and market orders in initial order entry phase
- Restrict market order modifications/cancellations in final phase
- Maintain post-close session at adjusted timing (3:50 PM to 4:00 PM)
- Apply CAS to all special trading sessions with same duration
- Ensure derivatives segment operates until 3:40 PM
Clearing Corporations Must:
- Update settlement systems to use CAS-determined closing prices for derivative stocks
- Adjust clearing and settlement processes for modified trading hours
Market Participants (Brokers, Traders, Investors):
- Adapt trading strategies to new session structure
- Update order management systems for CAS session
- Note restrictions on market order modifications in final 5 minutes
- Adjust algorithmic trading systems for new closing mechanism
Mutual Funds:
- Use CAS-determined closing prices for NAV calculation of derivative stocks
- Adjust fund valuation processes accordingly
Passive Funds:
- May utilize CAS to transact at closing price, reducing tracking error
Important Dates
- Circular Date: January 16, 2026
- Implementation Date: Not specified in the provided content (to be announced by exchanges)
- Applicable From: Date to be notified by Stock Exchanges after system readiness
Impact Assessment
Market Structure Impact:
- Fundamental change to price discovery mechanism for derivative stocks
- Alignment with global best practices (used in major international markets)
- Enhanced transparency and fairness in closing price determination
Liquidity Impact:
- Aggregation of market interest into single liquidity pool during CAS
- Improved execution efficiency for large orders at closing
- Better accommodation of passive fund flows
Derivatives Market:
- More robust reference price for derivatives settlement
- Reduced basis risk between cash and derivatives
- Continues trading until 3:40 PM to allow reaction to CAS closing price
Mutual Funds and Index Funds:
- More accurate NAV calculation based on auction-determined prices
- Reduced tracking error for passive/index funds
- Equal access to closing price execution
Trading Strategies:
- Market participants need to adapt closing strategies
- Volume concentration expected during CAS
- Random close mechanism prevents gaming/manipulation
Operational Impact:
- Technology systems require updates for new session structure
- Risk management systems need recalibration
- Trading desks require workflow adjustments for modified market hours
Investor Categories:
- Institutional investors: Better execution for large closing orders
- Retail investors: Fair access to closing price discovery
- FPIs: Improved transparency and price certainty for closing trades
- Algorithmic traders: Need strategy modifications for auction mechanics
Price Discovery:
- Single equilibrium price reflecting collective market consensus
- Reduced volatility in closing price compared to VWAP method
- Prevention of last-minute price manipulation attempts
Compliance and Surveillance:
- Enhanced market surveillance during CAS session required
- Random close mechanism adds integrity to price discovery
- Clear audit trail for closing price determination
Impact Justification
Major structural change to equity market closing mechanism affecting all derivative stocks, mutual fund NAV calculation, passive funds, and derivatives settlement. Introduces 20-minute auction session replacing VWAP methodology.