Highlights
- The Closing Auction Session will run from 3:30 pm to 3:40 pm on all trading days.
- The order-entry session will close at a randomly determined time between 3:38 pm and 3:40 pm.
- The revised framework is scheduled to take effect from December 7.
Sebi’s new closing auction rules: Will changes fix expiry-day pricing errors? Market expert flags complexity
Market expert Sandeep Parekh, while discussing the Securities and Exchange Board of India’s (SEBI) revised closing auction mechanism on ET NOW, said that he thinks this will reduce problems to some extent. He also cautioned that the new framework is more complex than the earlier volume-weighted average price (VWAP)-based system.
SEBI has overhauled the Closing Auction Session (CAS) mechanism in the equity cash segment, introducing a dedicated 10-minute auction window and revising the way reference prices and derivatives settlement prices are determined.
While Parikh believes the revised framework could resolve several issues associated with the earlier mechanism, he said its complexity and effectiveness will need to be assessed after implementation.
What are SEBI’s new closing auction rules?
Under the revised framework, the Closing Auction Session will run from 3:30 pm to 3:40 pm on all trading days. The order-entry session will close at a randomly determined time between 3:38 pm and 3:40 pm through a system-driven mechanism.
The session will begin with a one-minute window for calculating the reference price and transitioning eligible orders, followed by the order-entry period for limit and market orders.
The revised framework is scheduled to take effect from December 7, while provisions relating to the transition of unexecuted orders will become effective from February 8, 2027.
Why has SEBI changed the closing auction mechanism?
Parikh said the reform had become necessary to address these issues, even if the transition to a new system appeared sudden to market participants.
“I think reform had become more than necessary,” he said, adding that the proposed framework appeared capable of resolving the problem.
Explaining the liquidity concern, “Parikh said the issue was not necessarily market manipulation but the possibility that thin trading could cause prices to fluctuate sharply.”
“Even assuming that there’s no manipulation, I think it solves a problem of poor liquidity determining expiry prices for a much larger market,” he said.
How will the new rules affect derivatives expiry?
A key change concerns the settlement prices of expiring index and stock derivatives contracts.
Under the revised framework, the settlement price of expiring index derivatives will be determined using the underlying index value calculated from the VWAPs of its constituent stocks during the final 30 minutes of the cash-market session.
Asked whether the revised mechanism could make manipulation harder, Parikh focused on the broader issue of price accuracy rather than manipulation alone.
Will the new system eliminate pricing errors?
Parikh said the revised mechanism could address much of the problem of inaccurate prices once it is implemented. However, the effectiveness of the changes will ultimately depend on how the system operates in live market conditions.
He also explained that limited participation in the earlier auction mechanism had contributed to unreliable price discovery.
“People were not accustomed to an auction system and therefore they were not putting in their bids into that,” Parikh said.
He added that the lack of trading volumes had caused prices to move away from realistic levels. The fact that two exchanges conducted separate auctions, potentially generating different closing prices, was another concern.
Why is the market expert concerned about complexity?
Although Parikh sees merit in the reform, he cautioned that the new mechanism would be more complicated than the previous system based on the VWAP of the final 15 minutes.
Parikh also suggested that the new mechanism should initially be treated as an experiment rather than immediately becoming the benchmark for the market.
“If you’re able to kind of create a market on a parallel basis, not use it as a benchmark, but create an auction market and then if it picks up, yes, use it, if it doesn’t, dump it,” he said.
What should traders watch next?
The revised framework is scheduled to begin on December 7, 2026, with the order-transition provisions following on February 8, 2027. Its implementation will be closely watched by market participants, particularly those trading index and stock derivatives around expiry.