SEBI tweaking close auction session for better price discovery

The Securities and Exchange Board of India (SEBI) is working on fine-tuning its proposed Close Auction Session (CAS) for the equity cash market, potentially advancing its timing, structure, and applicability to address industry concerns, according to sources.

Under the revised plan, the closing auction is expected to take place from 3:15 to 3:30 pm, instead of the originally proposed 3:30 to 3:45 pm.

This change allows the session to run alongside the cash and derivatives markets, preventing any disruption and ensuring better price discovery, said a source aware of the discussions.

VWAP Alternative

SEBI had proposed the auction in December to determine stock closing prices, replacing the current Volume Weighted Average Price (VWAP) method, which does not allow trades at the exact closing price.

With CAS, the regulator aims to reduce volatility, particularly during index rebalancing and derivatives expiry, and bring India’s closing price mechanism in line with global markets.

While foreign funds tracking global indices have been strong advocates of the move, some domestic mutual funds and brokers have pushed back, citing concerns over liquidity and operational changes.

Liquidity concerns

The final framework is likely to be introduced in phases, starting with Nifty 50 and Sensex stocks instead of the originally planned entire list of derivative-traded securities.

“This adjustment addresses concerns that smaller, less-liquid stocks could see erratic price movements under the new system,” said the source.

SEBI may also revise the auction’s design, opting for a three-stage process instead of four, without a no-cancellation period and in-line with the pre-open call auction session.

The final structure might consist of a one-minute reference price determination period, followed by a 10-minute order-input period with a random closing window in the last two minutes, and a four-minute trade confirmation and order matching phase.

Narrower price band

The price band during the order input and random closing session might be narrowed to ±3 per cent from the reference price instead of ±5 per cent proposed earlier as it might be “too broad for highly liquid Nifty 50/Sensex stocks and may distort prices,” said one of the other sources.

With the change in timings of CAS, the time period for calculating the reference price based on VWAP might be cut to 15 minutes from the current 30-minute window. Accordingly, the reference price may be based on the VWAP of the last 15 minutes from 3:00-3;15 pm of the continuous trading session (CTS).

However, the proposals on the equilibrium price mechanism to determine the close price, types of orders allowed, order execution priority, carry forward, and settlement prices across clearing corporations are not expected to change. Additionally, SEBI may now continue the post-closing session at exchanges from 3:30 pm onwards, despite earlier plans to discontinue it.