The Securities and Exchange Board of India (SEBI) on December 5 proposed the introduction of a Close Auction Session (CAS) to determine the closing price of stocks in the equity cash market.
At present, the closing stock prices in India are set based on the Volume Weighted Average Price (VWAP) of the final 30 minutes of the trading day. While this method ensures a fair closing price, it does not allow for transactions at the exact closing price.
The proposed CAS would reduce price volatility at market close, particularly on days of index rebalancing and derivative expiry. It would also enable more efficient execution of large orders at the closing price, minimise tracking errors for passive funds, and improve alignment with index performance.
In its consultation paper, SEBI highlighted the global and domestic growth of passive fund investing. As the weight of Indian stocks in major international indices increases, passive funds face challenges in tracking these indices effectively.
The current VWAP system used to determine closing prices in India can lead to discrepancies for passive funds, which may ultimately affect investors. As a solution, SEBI suggested replacing the VWAP mechanism with a call-auction process to determine the closing price for each stock in the equity cash segment.
SEBI pointed out that many major markets worldwide already utilise a closing auction mechanism.
The regulator proposed that CAS be implemented in phases, starting with stocks that have derivative products, ensuring it applies only to stocks with sufficient liquidity.
Additionally, SEBI suggested that the CAS could be a 15-minute session from 3:30 pm to 3:45 pm, divided into four stages: reference price determination, order input, a no-cancellation period with a random closing of orders, and final trade confirmation and order matching.
Alternatively, SEBI proposed a three-session structure, omitting the no-cancellation period, similar to the pre-open session’s call auction architecture. This would include a reference price determination period, order input (with random closing in the last two minutes), and the final stage of trade confirmation and matching.
SEBI has sought public comments till December 26 on the proposals.