New Delhi: India’s securities regulator is moving to make changes to the country’s newly introduced stock market closing system after early trading has raised concerns about liquidity and price discovery. The Securities and Exchange Board of India, or SEBI, has asked stockbrokers to prepare their systems to accept orders during the first five minutes of the Closing Auction Session, a change expected to begin in September.
The Closing Auction Session, known as CAS, was introduced on August 3 for stocks in the cash market that also have futures and options contracts. The new system was designed to make closing prices more reliable by bringing buying and selling interest together at the end of the trading day and finding a price at which the largest possible amount of stock can be traded.
Under the current arrangement, regular trading for eligible stocks ends at 3:15 pm. A transition period then runs from 3:15 pm to 3:20 pm, during which the reference price is calculated and the market moves from continuous trading into the auction. Investors have not been able to place new orders during those first five minutes. Orders can then be entered during the next stage of the auction.
SEBI now wants brokers to accept orders during the transition period as well. The move is intended to bring more participants into the auction and increase the amount of buying and selling interest available when the final price is determined.
The change comes after the new system faced difficulties during its first weeks. Traders and brokers reported unusual movements around the market close, while the Nifty and Sensex at times showed wider differences than investors normally expect. Lower participation in the new auction has also raised questions about whether there is enough liquidity for the system to produce a stable and representative closing price.
The main purpose of CAS was to improve the way closing prices are discovered. Before the new system was introduced, closing prices for eligible stocks were based on a volume weighted average price calculated from trading during the final part of the regular session. Under CAS, buy and sell orders are gathered together and an equilibrium price is determined through the auction process.
The closing price is important far beyond the final number shown on a trading screen. It can influence index calculations, mutual fund valuations, portfolio values and the settlement of derivatives. A reliable closing price is therefore important for investors, fund managers, brokers and other market participants.
SEBI has made clear that the early problems do not mean it plans to abandon the new system. Instead, the regulator appears to be treating the first weeks as a period for adjustment. The decision to allow orders during the transition period is intended to increase participation without changing the basic structure of CAS.
Market participants have also pointed to operational challenges. Brokers have had to update their trading systems and educate customers about the new timetable. Investors who were accustomed to the old closing process have had to understand why the official closing price can differ from the price they saw during the final minutes of regular trading.
The new system has also attracted attention because of the effect it can have on derivatives trading. The closing price of an underlying stock can influence the value and settlement of related futures and options contracts. Any sharp movement during the auction can therefore have consequences beyond the cash market.
SEBI Chairman Tuhin Kanta Pandey has also warned market participants against attempts to manipulate the new closing mechanism. The regulator believes the auction structure can make suspicious activity easier to identify, but it also wants traders and brokers to understand that attempts to influence the closing price will face regulatory action.
The latest move therefore represents an adjustment rather than a retreat. SEBI is trying to increase the amount of genuine market interest entering the auction while maintaining the broader objective of creating a more transparent and reliable closing price.
For ordinary investors, the biggest change is that the final minutes of trading for eligible stocks now work differently. The last traded price is not necessarily the official closing price, and investors need to understand the auction process before making decisions based on end of day prices.
India’s new closing system is still in its early stages. The coming weeks will show whether allowing orders earlier in the auction can improve liquidity and reduce unusual price movements. If participation increases, SEBI will have stronger evidence that the new mechanism can deliver the deeper and more reliable price discovery it was designed to provide.
For now, the message from the regulator is clear. The Closing Auction Session is not being rolled back. Instead, India is refining the system as brokers, investors and exchanges gain experience with one of the country’s most significant changes to the way stock prices are determined at the end of the trading day.