BL Explainer: SEBI’s new Closing Auction Session, what investors need to know
Here's what's trending across India right now:
Beginning August 3, exchanges will move from the existing volume-weighted average price mechanism, based on the last 30 minutes of trading, to a Closing Auction Session, a 20-minute call auction designed to arrive at a single equilibrium closing price | Photo Credit: HEMANSHI KAMANI
Adding to this, India’s stock market is set for a significant change in how official closing prices are determined. Beginning August 3, exchanges will move from the existing volume-weighted average price (VWAP) mechanism, based on the last 30 minutes of trading, to a Closing Auction Session (CAS), a 20-minute call auction designed to arrive at a single equilibrium closing price. The move, introduced by SEBI and the exchanges, aims to strengthen price discovery, reduce the risk of end-of-day price manipulation, and ensure that benchmark prices used for indices, derivative settlements and mutual fund NAVs more accurately reflect true market demand and supply. Here’s what the new CAS means for investors, brokers and the broader market.
Meanwhile, How does the closing auction session work? How is it better than the VWAP-based closing price discovery method?
Notably, Today, the closing price is the volume-weighted average of trades in the last 30 minutes of the session. SEBI’s own analysis found that large institutional orders, index rebalancing trades and aggressive strategies can still meaningfully sway that average, which then feeds into index values, derivative settlements and mutual fund NAVs.
As per the latest buzz, From August 3, closing auction session replaces this with a 20-minute call auction held between 3:15 pm to 3:35 pm. In this session, the buy and sell orders will initially be pooled. Then the equilibrium price will be arrived at which will be the closing price. The equilibrium price is the one where maximum orders can be executed. That’s a structurally stronger design: a call auction that aggregates genuine demand and supply is far harder to influence with a handful of late orders than a trailing average of actual trades.
In further updates, “The Closing Auction Session is a structurally stronger framework because it aggregates all buy and sell interest and determines a single equilibrium price based on genuine demand and supply. That makes it significantly harder to influence the official closing price with a few late trades,” shared Sandeep Chordia, COO, Kotak Securities.
On top of that, “For investors tracking index funds, ETFs and mutual fund NAVs, the move should result in a more robust and tamper-resistant reference price. CAS will reduces the scope for ‘marking the close’ — where a trader nudges the last-30-minute average — which indirectly protects retail and passive investors from a mispriced settlement number. The one behavioural change investors should know: stop-loss and iceberg orders won’t work inside the auction window, so anyone used to placing those near 3:15 pm will need to adjust.
This is because in CAS , the exchange needs to see the full buy and sell interest to calculate the equilibrium price where the maximum volume can be matched, unlike iceberg order that hides large portion of the total order quantity from the market. Similarly stop-loss orders are conditional orders that become active only when a trigger price is reached, whereas in CAS the price changes are not continuous, evolving tick by tick.
Source: BusinessLine