Description

SEBI introduces Closing Auction Session (CAS) for determining closing prices of stocks with derivative contracts, replacing VWAP-based closing price methodology in a phased manner.

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 CAS will replace the current Volume Weighted Average Price (VWAP) methodology that uses trades from the last 30 minutes of continuous trading. This change brings Indian markets in line with global practices and aims to provide fairer, more transparent closing prices used for derivative settlement, index computation, and mutual fund NAV determination.

Key Points

  • CAS will be implemented in a phased manner, initially applicable only to stocks with derivative contracts
  • Remaining securities will continue using VWAP-based closing price from last 30 minutes of trading
  • CAS session will run for 20 minutes from 3:15 PM to 3:35 PM on all trading days
  • Order entry period includes random closure between 3:28 PM to 3:30 PM to prevent manipulation
  • Equity derivatives segment will continue until 3:40 PM (extended by 10 minutes)
  • Post-close session shifted to 3:50 PM to 4:00 PM for trades at closing price
  • Framework based on global best practices from major jurisdictions
  • Developed after consultation papers, SEBI Secondary Market Advisory Committee deliberations, and stakeholder feedback

Regulatory Changes

Closing Price Determination:

  • Stocks with derivative contracts: Closing price determined through CAS instead of VWAP
  • Non-derivative stocks: Continue with existing VWAP methodology (last 30 minutes of continuous trading)

Trading Session Structure:

CAS consists of 4 phases:

  1. Reference Price Calculation/Transition (3:15 PM - 5 minutes): System calculates reference price and transitions from continuous trading
  2. Full Order Entry (3:20 PM - 5 minutes): Both limit and market orders accepted
  3. Limited Order Entry (3:25 PM - 5 minutes): Only limit orders accepted, no modification/cancellation of market orders, random close in last 2 minutes
  4. Order Matching (3:30 PM - 5 minutes): System matches orders and determines closing price

Random Closure Mechanism:

  • Order entry session closes randomly between 3:28 PM to 3:30 PM (system-driven)
  • Designed to prevent manipulation and gaming of closing price

Segment Timings Revised:

  • Equity derivatives: Extended to 3:40 PM (from previous 3:30 PM)
  • Post-close session: Shifted to 3:50 PM - 4:00 PM
  • Special trading sessions: CAS duration and structure same as regular days, derivatives close 10 minutes after CAS order entry period

Compliance Requirements

For Stock Exchanges:

  • Implement CAS infrastructure and systems for stocks with derivative contracts
  • Ensure random closure mechanism is system-driven and tamper-proof
  • Configure trading systems to support the 4-phase CAS structure
  • Extend derivatives segment operations to 3:40 PM
  • Adjust post-close session timings to 3:50 PM - 4:00 PM
  • Apply CAS framework to special trading sessions

For Clearing Corporations:

  • Update settlement systems to use CAS-determined closing prices for derivative settlement
  • Coordinate with exchanges on new timings and price discovery mechanism

For Market Participants:

  • Adjust trading strategies and systems to accommodate new CAS timings
  • Update order management systems to handle CAS-specific order types and restrictions
  • Adapt algorithmic trading systems for new closing price mechanism
  • Review and modify passive fund strategies that rely on closing prices

For Mutual Funds:

  • Update NAV calculation processes to use CAS-determined closing prices for applicable stocks
  • Adjust fund accounting systems and timelines

For Index Providers:

  • Modify index computation methodologies to incorporate CAS closing prices

Important Dates

  • Circular Date: January 16, 2026
  • Implementation Date: Not specified in the provided content (circular appears incomplete)
  • Phased Rollout: Initial phase covers only stocks with derivative contracts

Impact Assessment

Market Structure Impact:

  • Fundamental change in price discovery mechanism for derivative stocks
  • Aggregates market interest into single liquidity pool, potentially improving execution for large orders
  • Aligns Indian markets with global best practices in major jurisdictions

Trading Impact:

  • Extended trading day: Derivatives segment runs 10 additional minutes
  • New order types and restrictions during different CAS phases
  • Random closure mechanism affects order placement strategies
  • Passive funds can execute at closing price with reduced tracking error

Operational Impact:

  • Mutual funds: Changes to NAV calculation processes and timing
  • Index computation: Modified closing price inputs for constituent stocks
  • Derivative settlement: Uses CAS price instead of VWAP for eligible stocks
  • Post-close session delayed by 20 minutes (now 3:50 PM - 4:00 PM)

Investor Benefits:

  • Fair and transparent closing price reflecting collective market consensus
  • Equal access for all investor categories
  • Improved liquidity aggregation for large orders
  • Reduced tracking error for passive investment strategies

Risk Considerations:

  • Participants need to adapt systems and strategies to new mechanism
  • Learning curve for market participants unfamiliar with auction-based closing
  • Coordination required across exchanges, clearing corporations, and market infrastructure

Impact Justification

Major structural change in price discovery mechanism affecting all stocks with derivatives, mutual fund NAV calculations, index computation, and settlement processes. Impacts trading timings and order execution for all market participants.