Description

SEBI introduces Closing Auction Session for derivative stocks to determine closing prices through auction mechanism instead of VWAP, effective in phased manner starting with stocks having derivative contracts.

Summary

SEBI has introduced a Closing Auction Session (CAS) in the equity cash segment to determine closing prices through an auction mechanism, replacing the current Volume Weighted Average Price (VWAP) method. Initially, CAS will apply to stocks on which derivative contracts are available. The CAS will operate as a separate 20-minute session from 3:15 PM to 3:35 PM, featuring a random close mechanism and distinct order entry periods. This change aligns Indian markets with global practices and aims to provide a fair, transparent closing price used for derivatives settlement, index computation, and mutual fund NAV determination.

Key Points

  • CAS introduced to replace VWAP method for determining closing prices of derivative stocks
  • 20-minute auction session from 3:15 PM to 3:35 PM on all trading days
  • Phased implementation: Initially applicable only to stocks with derivative contracts
  • Four distinct phases: Reference price calculation (5 mins), Order entry for limit and market orders (5 mins), Limit orders only with random close (5 mins), Order matching (5 mins)
  • Random closure between 3:28 PM to 3:30 PM to prevent gaming
  • Equity derivatives segment continues until 3:40 PM
  • Post-close session shifts to 3:50 PM - 4:00 PM for trades at closing price
  • Remaining securities continue with VWAP-based closing price from last 30 minutes of CTS
  • Global alignment: Major jurisdictions use auction-based closing price determination
  • Benefits include aggregated liquidity, reduced tracking error for passive funds, and transparent price discovery

Regulatory Changes

Closing Price Determination Method:

  • Derivative stocks: Transition from VWAP (last 30 minutes) to auction-based CAS pricing
  • Non-derivative stocks: Continue with VWAP method until further notice

Market Structure Changes:

  • New CAS session created as separate trading session
  • Modified trading timeline with extended active hours
  • Introduction of random close mechanism in auction session
  • Special trading sessions will also use CAS for closing price determination

Order Types and Entry Periods:

  • Session 1 (3:15-3:20 PM): Reference price calculation and transition
  • Session 2 (3:20-3:25 PM): Both limit and market orders accepted
  • Session 3 (3:25-3:30 PM): Only limit orders accepted, no modification/cancellation of market orders, random close in last 2 minutes
  • Session 4 (3:30-3:35 PM): Order matching period

Compliance Requirements

Stock Exchanges:

  • Implement CAS infrastructure and systems
  • Configure random close mechanism (3:28 PM - 3:30 PM window)
  • Update trading systems to support phased rollout for derivative stocks
  • Maintain VWAP calculation for non-derivative securities
  • Adjust post-close session timings to 3:50 PM - 4:00 PM

Clearing Corporations:

  • Update settlement systems to use CAS-determined closing prices for derivative stocks
  • Coordinate with exchanges on price dissemination

Trading Members:

  • Update trading systems and risk management for new session timings
  • Train dealers on CAS order entry rules and restrictions
  • Modify order management systems for different order entry periods
  • Update client communications regarding trading hours

Mutual Funds:

  • Adjust NAV calculation processes to use CAS closing prices for derivative stocks
  • Update fund accounting systems

Passive Funds:

  • Leverage CAS for closing price transactions to reduce tracking error

Market Participants:

  • Adapt trading strategies for auction-based closing mechanism
  • Understand order type restrictions in different CAS phases

Important Dates

Circular Issue Date: January 16, 2026

Implementation Timeline: Phased manner (specific dates to be announced by exchanges)

Initial Phase: CAS applicable to stocks with derivative contracts

Future Phase: Extension to remaining securities (timeline not yet specified)

Impact Assessment

Market Structure Impact:

  • Extended active trading hours with derivatives trading until 3:40 PM
  • Delayed post-close session (3:50 PM - 4:00 PM vs earlier timing)
  • Introduction of 20-minute auction window affects end-of-day workflows

Price Discovery Impact:

  • Improved price discovery through aggregated liquidity pool
  • Fair and transparent closing price reflecting market consensus
  • Alignment with global best practices used in major jurisdictions

Derivatives Market Impact:

  • More reliable closing prices for derivatives settlement
  • Reduced manipulation risk through auction mechanism and random close
  • Better alignment between cash and derivatives markets

Institutional Investor Impact:

  • Passive funds benefit from ability to transact at closing prices, reducing tracking error
  • Mutual funds get more reliable closing prices for NAV calculation
  • FPIs gain transparent access to closing price determination

Operational Impact:

  • Technology upgrades required for all market participants
  • Modified end-of-day processes and risk management procedures
  • Training requirements for trading personnel
  • System testing needed before implementation

Liquidity Impact:

  • Concentration of closing liquidity in auction session
  • Potential reduction in last 30-minute trading volatility
  • Large orders can be executed more efficiently at close

Index and Benchmark Impact:

  • More robust closing prices for index computation
  • Improved index tracking for passive investment products
  • Enhanced benchmark reliability for performance measurement

Risk Management Impact:

  • Random close mechanism prevents gaming and manipulation
  • Separate order entry periods for different order types enhance market integrity
  • Better price formation process reduces settlement risk

Impact Justification

Fundamental change in closing price determination mechanism for derivative stocks affecting settlement, index computation, mutual fund NAV, and passive fund operations. Alters trading hours and market structure with 20-minute auction session from 3:15 PM to 3:35 PM.