Description

SEBI introduces Closing Auction Session (CAS) for derivative stocks in equity cash segment, replacing VWAP-based closing price determination with auction-based mechanism from 3:15 PM to 3:35 PM.

Summary

SEBI has introduced a Closing Auction Session (CAS) in the equity cash segment to determine closing prices for stocks on which derivative contracts are available. The new mechanism replaces the current Volume Weighted Average Price (VWAP) method based on the last 30 minutes of trading. CAS will operate from 3:15 PM to 3:35 PM daily, featuring multiple order entry phases and a random closure mechanism. This aligns Indian markets with global practices and provides fairer price discovery, particularly important for derivatives settlement, index computation, and mutual fund NAV determination.

Key Points

  • CAS introduced for stocks with derivative contracts; remaining stocks continue using VWAP method
  • CAS session operates from 3:15 PM to 3:35 PM (20 minutes total)
  • Four distinct phases: reference price calculation (5 mins), full order entry (5 mins), limit-only orders (5 mins), and order matching (5 mins)
  • Random closure between 3:28 PM to 3:30 PM to prevent manipulation
  • Equity derivatives segment continues until 3:40 PM
  • Post-close session operates 3:50 PM to 4:00 PM for trades at closing price
  • Both limit and market orders accepted during CAS
  • Phased implementation: initially for derivative stocks, later expansion to all securities
  • Closing price used for derivatives settlement, index calculation, and mutual fund NAV

Regulatory Changes

New Price Determination Mechanism:

  • Closing price for derivative stocks now determined via CAS auction instead of VWAP
  • VWAP-based closing price retained for non-derivative stocks during last 30 minutes of continuous trading

Trading Session Structure:

  • Session 1 (3:15-3:20 PM): Reference price calculation and transition from continuous trading
  • Session 2 (3:20-3:25 PM): Order entry for both limit and market orders
  • Session 3 (3:25-3:30 PM): Limit orders only; no modification/cancellation of market orders; random close in last 2 minutes
  • Session 4 (3:30-3:35 PM): Order matching

Order Entry Rules:

  • System-driven random closure anytime between 3:28 PM to 3:30 PM
  • No modifications or cancellations of market orders during Session 3

Special Trading Sessions:

  • CAS duration remains same (20 minutes) on special trading days
  • Derivatives segment closes 10 minutes after CAS order entry period on special trading days
  • 10-minute post-close session on special trading days

Compliance Requirements

For Stock Exchanges:

  • Implement CAS framework with specified timings and session structure
  • Ensure system-driven random closure mechanism between 3:28-3:30 PM
  • Provide infrastructure for both limit and market orders during CAS
  • Maintain post-close session from 3:50 PM to 4:00 PM
  • Apply same CAS framework to special trading sessions

For Market Participants:

  • Adjust trading strategies to accommodate new closing price mechanism
  • Place orders during designated CAS sessions based on order type restrictions
  • Update systems to handle random closure timing
  • Passive funds can now execute at closing price during post-close session

For Clearing Corporations:

  • Use CAS-determined closing price for derivatives settlement
  • Coordinate with exchanges on implementation

Important Dates

  • Circular Issue Date: January 16, 2026
  • Implementation Date: Not specified in circular (phased implementation mentioned)
  • Consultation Papers Referenced: December 05, 2024 and August 22, 2025

Impact Assessment

Market Structure Impact:

  • Fundamental change in price discovery for derivative stocks
  • Aggregates market interest into single liquidity pool at close
  • Aligns Indian markets with global best practices

Operational Impact:

  • Extended trading window from current 3:30 PM to 3:35 PM for cash segment
  • Derivatives segment continues to 3:40 PM (no change)
  • New order management requirements for different CAS phases
  • Systems must handle random closure mechanism

Investor Impact:

  • Improved price transparency and fairness for closing prices
  • Equal access for all investor categories
  • Better execution for large orders through aggregated liquidity
  • Passive funds benefit from reduced tracking error via post-close session

Pricing Impact:

  • Closing price reflects collective market consensus rather than last 30-minute VWAP
  • Critical for derivatives settlement accuracy
  • Affects mutual fund NAV calculations
  • Impacts index computation

Risk Mitigation:

  • Random closure prevents manipulation attempts
  • Phased implementation reduces systemic risk
  • Separate sessions prevent order type confusion

Impact Justification

Major structural change to price discovery mechanism for derivative stocks, affects closing price determination used for derivatives settlement, index computation, and mutual fund NAV calculation. Impacts all market participants including passive funds, brokers, and investors.