Sebi new CAS rules: The Securities and Exchange Board of India (SEBI) reviewed key aspects of the Closing Auction Session (CAS), proposing a separate 10-minute session from 3:30 PM to 3:40 PM for improved transparency and integrity of closing prices. According to the revised framework, order entry will close randomly between 3:38 PM and 3:40 PM to prevent last-minute manipulation.
SEBI also introduced restrictions on iceberg and stop-loss orders during CAS, revised reference price calculations and proposed rules for carrying forward unexecuted iceberg orders as fully disclosed limit orders. Most of the changes will be effective from December 7, 2026 and the iceberg transition rules will be implemented from February 8, 2027. Market experts beleive this change will result in better price discovery, improved liquidity and greater retail participation.
Market welcomes SEBI’s revised CAS rules
Experts think the new revisions address key concerns over price volatility, distorted option premiums and the challenges of determining fair settlement prices under the closing auction mechanism. The framework is expected to build stability to expiry-day trading, improve price discovery and reinstate trader confidence.
Kamlesh Shroff of ANMI explained to ET NOW how this development addresses investor concerns around derivative settlement prices. “The expiry settlement price will now be determined using the 30-minute VWAP (Volume-Weighted Average Price) which will continue for the next year, after which the regulator may review it further,” he said.
“Once cash volumes rise to levels comparable with the derivatives market, the closing auction session could become a more efficient mechanism for determining prices. The issue of limited liquidity in the cash market leading to volatility in settlement prices has been addressed. Given that the derivatives market is significantly larger than the cash market, it was important to establish a mechanism that ensures more reliable price discovery for derivative settlements.”
Further, this indicative pricing display provision during the auction period will enable market participants to retain visibility into price movements. “The key positive is that derivative settlement prices will be delinked from closing prices, which helps ensure better price discovery. Indicative values will be displayed during the auction period, allowing market participants to maintain visibility on price movements. Stock derivatives will continue trading until 3:45 pm, giving participants additional time to manage their positions and address any settlement obligations,” Shroff added.
Chandan Taparia of Motilal Oswal pointed at heightened volatility over the past two months after CAS was implemented.”Price fluctuations arising from the 3% price band on orders led to volatility in expiry-day price movements. The indicative price mechanism has been one of the key factors contributing to this volatility. The shorter window for indicative pricing under the revised framework could help reduce these fluctuations. Earlier, the pause in trading followed by the Closing Auction Session created uncertainty around price movements. The revised structure could help improve liquidity and keep market fluctuations and volatility relatively lower.”
Benefits for Retail & liquidity/pricing stability
Shroff cautioned that adopting a cash-market-based settlement mechanism calls for deeper liquidity in the underlying market. ” India may not yet be ready for a full-fledged transition to CAS despite global trends. Apart from two or three expiry days when cash market liquidity accounted for around 22–24% of the relevant volumes, it has generally been in the range of 2–3% on other expiry days. At such low levels of liquidity, prices can move in either direction.” A cash-based mechanism could become more efficient once cash-market volumes rise substantially, he noted.
“Trading practices are likely to return to what they were before the changes introduced two months ago. This could encourage greater retail participation on expiry days,” Motilal Oswal Wealth Management’s Chandan Taparia told ET NOW.
The changes may benefit retail traders who saw some hardships while navigating premium fluctuations. “We have seen some decline in trading volumes over past 2 months. Earlier, non-expiry-day volumes were broadly in line with expiry-day activity.
The revised framework could bring back participation on expiry days and offer retail participants greater clarity in closing prices compared with the existing CAS mechanism.”
The revised framework is expected to enable the recovery of the previously observed pattern of trade and the better discovery of settlement prices will motivate market participants. This may help revive trade volumes that declined recently. Although the actual effect will be visible over a period of time, the market believes that derivatives markets will be more stabilized now after these revisions are implemented.