SEBI proposes to introduce close auction session in equity markets

Markets regulator SEBI on Thursday proposed introducing a Close Auction Session (CAS) framework in the country to determine the closing price of stocks in the equity cash market.

Currently, the closing price of stocks in India is determined using the Volume Weighted Average Price (VWAP) of the last 30 minutes of the trading day. While the mechanism facilitates the determination of a fair market closing price, it does not allow trades at the exact closing price.

The introduction of CAS would reduce price volatility during the market close, especially on index rebalancing and derivative expiry days, ensuring better execution of large orders at the closing price and minimizing tracking differences for passive funds, enhancing alignment with index performance.

In its consultation paper, SEBI noted that passive fund investing has been growing globally and in India. As the weightage of Indian stocks in major international indices rises, challenges in tracking indices have emerged for passive funds.

It further said that the current system of determining the closing price in India using the last half-hour Volume Weighted Average Price can lead to tracking differences for passive funds, ultimately impacting investors.

Accordingly, SEBI has proposed that CAS can be introduced as a call-auction mechanism for determining the closing price of each stock in the equity cash segment, replacing the extant VWAP mechanism.

It is also noted that major jurisdictions around the world have a closing auction mechanism.

The regulator suggested that CAS should be applied to stocks in a phased manner. To begin with, CAS should be applicable to stocks on which derivatives are available, to ensure this is only offered on stocks on which have sufficient liquidity.

Further, SEBI suggested that CAS may be implemented as a separate session of 15 minutes from 15:30 to 15:45.

CAS may be split into 4 sessions—a reference price determination period, an order input period and a no-cancellation period including a random close of order entry followed by the final stage of trade confirmation and order matching.

Alternatively, SEBI proposed that CAS may be split into three sessions, without a no-cancellation period, in line with the architecture of the Call Auction in the pre-open session.

A Reference Price Determination period, an order input period including random closing of order entry in the last 2 minutes and the final stage of trade confirmation and order matching.

The Securities and Exchange Board of India (SEBI) has sought public comments till December 26 on the proposals.