The market regulator, Securities and Exchange Board of India (SEBI), on Thursday proposed a Closing Auction Session (CAS) in the equity cash segment to improve the process of determining closing prices.
As per the regulator's suggestions, a 15-minute auction session will be held from 3:30 PM to 3:45 PM, in place of the current Volume Weighted Average Price (VWAP) method. This is to provide a more accurate way to find closing prices, especially in high-volatility conditions such as index rebalancing days. Initially, the CAS would apply to stocks with derivatives trading, ensuring that only highly liquid stocks are included.
The CAS will allow market participants to trade at the closing price, which removes the need for a separate post-closing session. The closing price will be based on the weighted average of CAS prices across interoperable exchanges.
As per the proposal paper on the website, the regulator's move is in response to concerns of high volatility and liquidity concentration in the final 30 minutes of trading, especially when index rebalancing occurs.
Data from international markets such as Hong Kong and South Korea, which already implement CAS, shows a reduction in volatility during the final trading session, helping maintain an orderly market environment. By adopting a similar approach, SEBI wished to ensure an accurate closing price. The regulator also wishes to help foreign institutional investors align their trades with market closing prices.
On index rebalancing days, for example, India has witnessed spikes in volatility, while markets with CAS have seen smoother price discovery with no such volatility surges.
SEBI's proposal also notes that the shift to CAS could encourage foreign institutional investors and mutual funds to execute their trades based on the closing price determined during the auction, rather than waiting until the end of regular trading hours.
The CAS is designed to have four stages: a reference price calculation period, an order input period, a no-cancellation period, and a final stage for order matching and trade confirmation. During the order input period, a price band of ± 5% will be applied, and during the no-cancellation period, no changes can be made to the orders, with a random close in the last two minutes of the session. The final matching of orders will follow a price-time priority structure.
SEBI's proposal also suggests that unexecuted orders from the regular trading session could be carried forward to the CAS, provided they fall within the price limits, and would be treated as limit orders with higher priority than those placed during the auction.
Furthermore, the settlement price for a security will be based on the weighted average of the equilibrium prices determined across exchanges during CAS.
If the proposal is implemented, the current post-closing session, which is held at exchanges after the market closes, will be discontinued. The CAS is expected to provide participants with the ability to execute trades at the closing price, making the post-close session redundant.
SEBI has invited public comments by Dec 26, 2024.
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