Description

SEBI introduces Closing Auction Session (CAS) for derivative stocks in equity cash segment to determine closing price through auction mechanism instead of VWAP, with phased implementation 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 through an auction mechanism instead of the current Volume Weighted Average Price (VWAP) method. Initially, CAS will apply to stocks on which derivative contracts are available, while other securities will continue using VWAP. The CAS will operate from 3:15 PM to 3:35 PM daily, featuring a 20-minute session with order entry, random close, and order matching phases. This change aligns Indian markets with global best practices and provides fair, transparent closing prices used for derivatives settlement, index computation, and mutual fund NAV determination.

Key Points

  • CAS introduced as separate 20-minute session from 3:15 PM to 3:35 PM on all trading days
  • Phased implementation: Initially applicable only to stocks with derivative contracts available
  • Closing price for remaining securities continues to be determined by VWAP of last 30 minutes of CTS
  • CAS session structure: 5 minutes reference price calculation, 5 minutes order entry (limit and market orders), 5 minutes order entry (limit orders only), 5 minutes order matching
  • Random close between 3:28 PM to 3:30 PM (system-driven)
  • Equity derivatives segment continues until 3:40 PM
  • Post-close session operates 3:50 PM to 4:00 PM where trades execute at closing price
  • Both limit and market orders allowed in CAS
  • Market orders cannot be modified/cancelled in the final order entry period (3:25 PM - 3:30 PM)
  • CAS also applicable to special trading sessions with same duration structure

Regulatory Changes

Closing Price Determination Method:

  • Previous: VWAP of trades executed during last 30 minutes of Continuous Trading Session
  • New: Closing price determined through Closing Auction Session for derivative stocks
  • Rationale: Aggregates market interest into single liquidity pool, provides fair and transparent closing price, improves execution efficiency for large orders

Trading Session Structure:

  • CAS operates as separate session post-CTS closure
  • Derivatives segment timing unchanged (continues to 3:40 PM)
  • Post-close session shifted to 3:50 PM - 4:00 PM (from earlier timing)

Order Entry Rules in CAS:

  • Session 1 (3:15-3:20 PM): Reference price calculation and transition from CTS
  • Session 2 (3:20-3:25 PM): Order entry for both limit and market orders
  • 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
  • Session 4 (3:30-3:35 PM): Order matching

Scope of Application:

  • CAS applies to stocks in cash segment with available derivative contracts
  • VWAP method retained for remaining securities in cash segment
  • CAS closing price used for derivatives settlement, index computation, mutual fund NAV determination

Compliance Requirements

Stock Exchanges:

  • Implement CAS infrastructure and systems for derivative stocks
  • Configure 20-minute CAS session with specified timings and phases
  • Implement random close mechanism (system-driven) between 3:28 PM - 3:30 PM
  • Adjust post-close session timing to 3:50 PM - 4:00 PM
  • Ensure CAS applicable to special trading sessions with same duration structure
  • Configure order entry rules: both limit/market orders in first entry period, only limit orders in second entry period
  • Implement restrictions on market order modification/cancellation in final entry period

Clearing Corporations:

  • Update settlement systems to use CAS-determined closing prices for derivative stocks
  • Coordinate with stock exchanges on CAS implementation

Market Participants (Brokers, Traders, Investors):

  • Adjust trading strategies and systems for new CAS timing (3:15 PM - 3:35 PM)
  • Understand order entry rules and restrictions in different CAS phases
  • Note market orders cannot be modified/cancelled after 3:25 PM in CAS
  • Plan for random close mechanism between 3:28 PM - 3:30 PM

Mutual Funds:

  • Update NAV calculation systems to use CAS-determined closing prices for derivative stocks
  • Passive funds can utilize CAS to transact at closing price, reducing tracking error

Index Providers:

  • Update index computation systems to use CAS-determined closing prices for constituent stocks with derivatives

Important Dates

  • Circular Date: January 16, 2026
  • Implementation Date: Not specified in the circular (to be announced by stock exchanges)
  • Circular Reference: HO/47/11/11(3)2025-MRD-POD2/I/2765/2026

Daily CAS Timings (Post-Implementation):

  • 3:15 PM - 3:20 PM: Reference price calculation and transition
  • 3:20 PM - 3:25 PM: Order entry period (limit and market orders)
  • 3:25 PM - 3:30 PM: Order entry period (limit orders only, random close in last 2 minutes)
  • 3:28 PM - 3:30 PM: Random close window (system-driven)
  • 3:30 PM - 3:35 PM: Order matching
  • 3:40 PM: Equity derivatives segment close
  • 3:50 PM - 4:00 PM: Post-close session

Impact Assessment

Market Structure Impact:

  • High: Fundamental change in closing price determination mechanism for derivative stocks
  • Aligns Indian markets with global best practices followed in major jurisdictions
  • Aggregates market interest into single liquidity pool at day’s end

Liquidity and Price Discovery:

  • Positive: Improved execution efficiency for large orders through consolidated liquidity
  • Enhanced price transparency through auction mechanism
  • Fair and transparent closing price reflecting collective market consensus
  • Single equilibrium price discovery versus time-weighted average

Institutional Investors and Passive Funds:

  • High Positive: Passive funds can transact at closing price, reducing tracking error
  • Better execution for index rebalancing and portfolio adjustments
  • Reduced market impact for large closing orders

Derivatives Market:

  • Critical: Closing prices used for derivatives settlement become auction-based
  • More robust reference price for futures and options settlement
  • Derivatives segment continues 10 minutes post-CAS (until 3:40 PM)

Mutual Funds:

  • Significant: NAV determination for derivative stocks based on CAS closing price
  • More reliable and transparent pricing for unit holders
  • Potential reduction in NAV computation discrepancies

Index Computation:

  • Material: Index values at close based on CAS prices for derivative constituents
  • Enhanced index integrity and reduced manipulation risk
  • Better benchmark reliability for passive products

Trading Operations:

  • Medium: Extended trading activity window (additional 20 minutes post-CTS)
  • Traders need to adapt strategies for CAS participation
  • Random close mechanism prevents gaming of auction close time
  • Post-close session provides additional execution opportunity at determined closing price

Technology and Systems:

  • High: Stock exchanges and market participants require system upgrades
  • Implementation of auction matching algorithms
  • Random close mechanism implementation
  • Order management systems need updates for CAS order types and restrictions

Phased Implementation Consideration:

  • Initially limited to derivative stocks (lower implementation risk)
  • VWAP continues for non-derivative stocks (gradual transition)
  • Future expansion to all securities likely based on initial phase performance

Stakeholder Consensus:

  • Decision based on public consultation (December 2024, August 2025)
  • Secondary Market Advisory Committee deliberations
  • Feedback from stock exchanges, clearing corporations, mutual funds, and FPIs incorporated

Impact Justification

Major structural change to market operations affecting closing price determination for all derivative stocks, impacting derivatives settlement, index computation, mutual fund NAV calculations, and trading hours. Affects all market participants including institutional investors, passive funds, and individual traders.