Description
SEBI introduces Closing Auction Session for derivative stocks to determine closing prices through auction mechanism instead of VWAP, improving price discovery and market efficiency.
Summary
SEBI has introduced a Closing Auction Session (CAS) for stocks in the equity cash segment on which derivative contracts are available. The closing price will now be determined through a 20-minute auction session from 3:15 PM to 3:35 PM, replacing the current Volume Weighted Average Price (VWAP) method based on last 30 minutes of trading. This change aligns Indian markets with global best practices and improves price discovery for settlement in derivatives, index computation, and mutual fund NAV determination.
Key Points
- CAS will be implemented in phased manner, initially applicable only to stocks with derivative contracts
- 20-minute auction session from 3:15 PM to 3:35 PM on all trading days
- Four distinct phases: reference price calculation (5 mins), order entry for all orders (5 mins), limit orders only with random close (5 mins), and order matching (5 mins)
- Random closure of order entry between 3:28 PM to 3:30 PM to prevent gaming
- Equity derivatives segment will continue till 3:40 PM
- Post-close session shifted to 3:50 PM - 4:00 PM for trades at closing price
- Remaining securities will continue using VWAP method for closing price determination
- Provides fair and transparent closing price reflecting collective market consensus
- Facilitates passive funds to transact at closing price, reducing tracking error
Regulatory Changes
Current System:
- Closing price determined by VWAP of trades in last 30 minutes of Continuous Trading Session
New System (for derivative stocks):
- Closing price determined through Closing Auction Session
- CAS aggregates market interest into single pool of liquidity
- Equal and transparent access to all investor categories
Session Structure:
- 3:15 PM - 3:20 PM (5 mins): Reference price calculation and transition from CTS to CAS
- 3:20 PM - 3:25 PM (5 mins): Order entry period for both limit and market orders
- 3:25 PM - 3:30 PM (5 mins): Only limit orders allowed, no modification/cancellation for market orders, random close in last 2 minutes
- 3:30 PM - 3:35 PM (5 mins): Order matching
Compliance Requirements
Stock Exchanges must:
- Implement CAS infrastructure and systems for 20-minute auction session
- Enable random closure mechanism between 3:28 PM - 3:30 PM
- Adjust post-close session timings to 3:50 PM - 4:00 PM
- Apply same CAS framework to special trading sessions
Clearing Corporations must:
- Update settlement systems to use CAS-determined closing prices for derivative stocks
- Coordinate with exchanges on implementation
Market Participants should:
- Adjust trading strategies to account for new closing price mechanism
- Update order management systems for CAS participation
- Prepare for phased implementation starting with derivative stocks
Mutual Funds and Passive Funds:
- Can transact at closing price during CAS
- Benefit from reduced tracking error
- Update NAV calculation processes
Important Dates
- Circular Date: January 16, 2026
- Implementation Date: To be announced by Stock Exchanges (phased implementation)
- Initial Phase: Applicable to stocks with derivative contracts
- Future Phases: Extension to remaining securities to be notified separately
Impact Assessment
Market Structure Impact:
- Significant change to price discovery mechanism for derivative stocks
- Extended trading day structure with CAS from 3:15 PM to 3:35 PM
- Derivatives segment continues till 3:40 PM (5 minutes after CAS)
Price Discovery Impact:
- More transparent and fair closing price determination
- Single pool of liquidity aggregation improves execution efficiency for large orders
- Closing price reflects collective market consensus at end of trading
- Reduces potential for manipulation compared to VWAP method
Derivatives Settlement:
- Closing prices from CAS will be used as reference for derivatives settlement
- Improved alignment between cash and derivatives segments
Index Computation:
- Index closing values will be based on CAS prices for constituent stocks with derivatives
- More accurate index representation
Mutual Funds:
- NAV determination based on CAS closing prices
- Passive funds can transact at closing price, reducing tracking error
- Better alignment with benchmark indices
Operational Impact:
- Market participants need to adjust order submission strategies
- Systems and algorithms need updates for new session structure
- Random closure mechanism prevents gaming and ensures fair participation
Global Alignment:
- Brings Indian markets in line with global best practices
- Major jurisdictions use auction-based closing price determination
Liquidity Impact:
- Concentration of closing orders in auction may improve liquidity at close
- Better execution for large institutional orders
- Enhanced market efficiency
Impact Justification
Major structural change to price discovery mechanism affecting all derivative stocks, mutual fund NAVs, index computation, and derivatives settlement