Description

SEBI introduces Closing Auction Session for derivative stocks to determine closing prices through a 20-minute auction from 3:15 PM to 3:35 PM, replacing VWAP-based closing for these securities.

Summary

NSE circular dated January 19, 2026 implements SEBI’s directive to introduce Closing Auction Session (CAS) in the equity cash segment. The CAS will initially apply to stocks on which derivative contracts are available, with closing prices determined through a 20-minute auction session from 3:15 PM to 3:35 PM instead of the current VWAP-based method. This aligns Indian markets with global practices and aims to provide fairer, more transparent closing prices used for derivatives settlement, index computation, and mutual fund NAV determination.

Key Points

  • Closing Auction Session (CAS) introduced as new 20-minute session from 3:15 PM to 3:35 PM
  • Initially applicable only to stocks with derivative contracts available
  • Remaining securities continue using VWAP of last 30 minutes of Continuous Trading Session
  • CAS provides single pool of liquidity for fair and transparent closing price discovery
  • Closing prices used for derivatives settlement, index computation, and mutual fund NAV calculations
  • Implementation follows global best practices from major jurisdictions
  • Enables passive funds to transact at closing price, reducing tracking error
  • Four-phase auction structure with specific order entry and matching periods

Regulatory Changes

New Closing Price Determination Method:

  • For derivative stocks: Closing price determined through CAS auction mechanism
  • For non-derivative stocks: Existing VWAP method retained (last 30 minutes of CTS)

CAS Session Structure (3:15 PM - 3:35 PM):

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

Rationale for Changes:

  • Aggregates market interest into single liquidity pool
  • Provides equal and transparent access to all investor categories
  • Ensures closing price reflects collective market consensus
  • Facilitates passive fund transactions at closing price
  • Reduces tracking error for index funds

Compliance Requirements

All Trading Members:

  • Update trading systems to accommodate new 20-minute CAS session
  • Modify order management systems to handle CAS-specific order types and restrictions
  • Train trading personnel on CAS order entry rules and phased structure
  • Adjust risk management systems for extended trading hours

Technology Requirements:

  • System readiness for CAS session timings (3:15 PM - 3:35 PM)
  • Support for limit and market orders during specified phases
  • Implementation of order modification/cancellation restrictions in Phase 3
  • Random close mechanism in final 2 minutes of Phase 3

Operational Adjustments:

  • Review and update closing price-dependent processes
  • Coordinate with clients regarding new closing price mechanism
  • Update surveillance and monitoring systems for CAS activity

Important Dates

  • January 16, 2026: SEBI circular issued
  • January 19, 2026: NSE circular disseminated to members
  • Implementation Date: Not specified in circular (to be announced)
  • Phased Rollout: Initial phase covers derivative stocks only; subsequent phases for remaining securities to be announced

Impact Assessment

Market Structure Impact:

  • Extends effective trading hours by 20 minutes (from 3:15 PM to 3:35 PM)
  • Changes fundamental price discovery mechanism for derivative stocks
  • Aligns Indian market practices with global standards

Participant Impact:

  • Institutional Investors: Better execution for large orders through concentrated liquidity
  • Passive Funds: Reduced tracking error through direct closing price transactions
  • Derivatives Market: More transparent reference prices for settlement
  • Mutual Funds: More accurate NAV determination based on auction-discovered prices
  • Retail Investors: Equal access to closing price discovery process

Operational Impact:

  • Trading members require system upgrades and testing
  • Extended operational hours for market participants
  • Modified surveillance and risk management procedures
  • Changes to end-of-day processes and workflows

Price Discovery Impact:

  • Single equilibrium price replaces volume-weighted average
  • Concentrated liquidity pool may improve price efficiency
  • Reduced potential for price manipulation at market close
  • Greater transparency in closing price determination

Derivatives Market Impact:

  • More reliable reference prices for derivatives settlement
  • Potential reduction in basis risk between cash and derivatives
  • Improved alignment of cash and derivatives market close

Global Alignment:

  • Brings Indian markets in line with major global exchanges
  • Facilitates international investment and comparison
  • Enhances market credibility and sophistication

Impact Justification

Major structural change to price discovery mechanism affecting all derivative stocks, mutual fund NAV calculations, and passive fund operations. Changes fundamental market closing procedures used by all market participants.