Description

SEBI introduces Closing Auction Session (CAS) for equity cash segment stocks with derivative contracts to determine closing prices through auction mechanism instead of VWAP, effective in phased manner.

Summary

SEBI introduces Closing Auction Session (CAS) in the equity cash segment to determine closing prices through an auction mechanism instead of the current Volume Weighted Average Price (VWAP) method. Initially applicable to stocks with derivative contracts, CAS will operate from 3:15 PM to 3:35 PM as a separate 20-minute session. The closing price determined through CAS will be used for derivatives settlement, index computation, and mutual fund NAV determination. This change brings Indian markets in line with global practices and provides fairer, more transparent closing prices with aggregated liquidity.

Key Points

  • CAS will be implemented in phased manner - initially for stocks with derivative contracts available
  • Current VWAP-based closing price (last 30 minutes) will be replaced by auction-based price discovery for derivative stocks
  • Remaining securities will continue using VWAP method during transition
  • CAS session duration: 20 minutes (3:15 PM to 3:35 PM)
  • 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 in cash segment: 3:50 PM to 4:00 PM (trades at closing price)
  • CAS aggregates market interest into single liquidity pool for better execution of large orders
  • Provides equal and transparent access to all investor categories
  • Facilitates passive funds to transact at closing price, reducing tracking error

Regulatory Changes

Closing Price Determination Methodology:

  • Stocks with derivative contracts: Closing price determined through CAS auction mechanism
  • Other securities: Continue with VWAP of trades executed during last 30 minutes of Continuous Trading Session

New Trading Session Structure:

  • Session 1 (3:15-3:20 PM): Reference price calculation / Transition from CTS to CAS (5 minutes)
  • Session 2 (3:20-3:25 PM): Order entry period for both limit and market orders (5 minutes)
  • Session 3 (3:25-3:30 PM): Order entry only for limit orders, no modification/cancellation for market orders, random close in last 2 minutes (5 minutes)
  • Session 4 (3:30-3:35 PM): Order matching (5 minutes)

Special Trading Sessions:

  • CAS applicable for closing price determination in special trading sessions
  • CAS duration in special sessions equals regular session duration (20 minutes)
  • Derivatives segment closes 10 minutes after CAS order entry period ends
  • 10-minute post close session on special trading days

Compliance Requirements

Stock Exchanges:

  • Implement CAS infrastructure and systems for 20-minute auction session
  • Configure random closure mechanism for order entry (between 3:28-3:30 PM)
  • Adjust trading hours and session timings accordingly
  • Apply CAS to stocks with derivative contracts in phased manner
  • Maintain VWAP calculation for non-derivative stocks

Clearing Corporations:

  • Adopt CAS-determined closing prices for derivatives settlement
  • Update settlement systems and processes

Market Participants (Brokers, Trading Members):

  • Update trading systems and terminals for new CAS session
  • Modify order routing and execution workflows
  • Train personnel on CAS order entry rules and restrictions
  • Adjust algorithmic trading strategies for new closing mechanism

Mutual Funds:

  • Use CAS-determined closing prices for NAV computation for applicable securities
  • Adjust NAV calculation processes and systems

Passive Funds:

  • Utilize CAS for transacting at closing prices to reduce tracking error

Important Dates

  • Circular Date: January 16, 2026
  • Implementation timeline: Phased manner (specific dates to be announced by Stock Exchanges)
  • Effective Date: To be notified by Stock Exchanges

New Trading Hours Structure:

  • CAS Session: 3:15 PM - 3:35 PM
  • Equity Derivatives: Up to 3:40 PM
  • Post Close Session (Cash): 3:50 PM - 4:00 PM

Impact Assessment

Market Structure Impact:

  • Fundamental change in price discovery mechanism for derivative stocks affecting settlement, index computation, and NAV determination
  • Alignment with global best practices adopted in major jurisdictions
  • Extended trading activity period with new 20-minute auction session

Liquidity Impact:

  • Aggregation of market interest into single liquidity pool during CAS
  • Improved execution efficiency for large orders
  • Better price discovery through collective market consensus

Participant Impact:

  • Passive funds benefit from ability to transact at closing price, reducing tracking error
  • All investor categories get equal and transparent access to closing price determination
  • Algorithmic and high-frequency traders need to adjust strategies
  • Market makers and liquidity providers may need to reassess end-of-day strategies

Operational Impact:

  • Brokers and trading members require system upgrades and workflow modifications
  • Clearing corporations need to update settlement processes
  • Mutual funds must adjust NAV calculation systems
  • Risk management systems need recalibration for new closing price mechanism

Derivatives Market Impact:

  • Settlement prices for derivatives now based on auction-determined closing prices
  • Potential reduction in price manipulation concerns
  • More reliable reference price for futures and options settlement

Transparency and Fairness:

  • Enhanced transparency in closing price determination
  • Reduced potential for price manipulation during closing minutes
  • Fair price discovery reflecting true market consensus at close

Impact Justification

Major structural change to closing price determination mechanism for all derivative stocks, affecting settlement, index computation, mutual fund NAV, and passive fund operations. Introduces new 20-minute auction session altering trading hours and workflows for all market participants.