SEBI suggests new framework for Closing Auction Session in equity cash segment

SEBI suggests new framework for Closing Auction Session in equity cash segment

Seeks public comments till 12 September

The Securities and Exchange Board of India (SEBI) has proposed a new framework for the Closing Auction Session (CAS) in the equity cash market. It will reduce volatility, improve fairness, and make it easier for large and passive investors to execute trades.

SEBI’s consultation paper explained that CAS would be applied in a phased manner, beginning with highly liquid derivative stocks to determine the shares’ closing prices. Later, it would be extended to all stocks.

(A closing auction session is a short trading period held at the end of the day to determine the final price of a security).

The market regulator clarified that the session would be held separately for 20 minutes (3:15 pm to 3:35 pm), unlike its earlier proposal suggesting conducting it after market hours (3:30 pm to 3:45 pm).

SEBI added that the session would be divided into four phases -reference price calculation, order entry, random close and final matching. And index derivatives would continue to close at 3:30 pm, while near-month stock derivatives would close at 3:35 pm on expiry days.

For orderly trading, CAS will operate within a 3 percent up or down band of the reference price. This will be determined using the Volume Weighted Average Price (VWAP) of trades between 3 pm and 3:15 pm.

Similarly, execution rules will change, with market orders receiving priority over limit orders, unlike in the pre-open session. Any unexecuted limit orders from the continuous session will automatically move to CAS but cannot be modified, only cancelled.

The consultation paper also mentions the transparency aspects of the dissemination of real-time data during CAS. It will include the indicative equilibrium price, cumulative buy and sell quantities, and imbalance data (total and specific to market orders) to help consumers make decisions accordingly.

However, the regulator has raised a potential challenge for passive mutual funds (MFs). On index rebalancing days, these funds may face negative cash balances after CAS trades, as they avoid cash to minimize tracking errors. This could lead to settlement difficulties.

To address the issue, it suggests allowing passive MFs to borrow overnight to meet short-term liquidity requirements arising from CAS trades.

In December 2024, SEBI proposed introducing a CAS in the equity cash market to replace the current VWAP-based method for determining closing prices of stocks.

However, subsequent to stakeholders’ feedback and deliberations in the Secondary Market Advisory Committee, several changes were incorporated in the proposed revised CAS design.

It highlighted that data suggests ‘CAS provides a more stable and less volatile closing price compared to what’s observed under a VWAP-based closing price methodology, even when handling the same level of trading volume.’

VWAP-based closing can trigger volatility on index rebalancing days, as large trades executed in the final minutes tend to distort prices. On the other hand, CAS reduces such distortions by placing buy and sell orders into a single transparent auction. It ensures better price discovery and execution for institutional investors.