3 days ago
India’s New Closing Auction Draws Praise and Market Concerns
India has changed how the final prices of stocks are decided each day.
The new system is called the Closing Auction Session, or CAS.
Before, prices were largely calculated using trading during the last 30 minutes.
Now, traders can submit orders during a special period before the market closes.
They can choose prices, but they do not know for sure whether all their orders will be matched.
Many large traders are being cautious because the system is still unfamiliar.
Derivatives continue trading for 10 minutes after the stock market’s CAS ends, which can cause price differences and sudden movements.
Tejas Shah thinks the system could be fairer, but he says it may need more preparation and changes.
Retail investors are not affected much unless they choose to trade during the CAS.
SEBI introduced the Closing Auction Session at the start of the month to change how market closing prices are determined.
The CAS accepts orders after 3:15 p.m., with limit orders allowed until a randomly selected close between 3:27 and 3:30 p.m.
Equirus Group’s Tejas Shah said CAS could make price discovery more democratic but was introduced too quickly.
Thin volumes reflect uncertainty, limited order visibility and the absence of major arbitrage, proprietary and institutional participants.
Shah said derivatives continuing until 3:40 p.m. may create mismatches and volatility while the underlying market is already closed.
- Who
- The Securities and Exchange Board of India introduced the mechanism; Tejas Shah of Equirus Group discussed its effects.
- What
- India introduced a Closing Auction Session to determine market closing prices through an order-matching process.
- Where
- Indian stock exchanges and markets.
- When
- The CAS began at the start of the month discussed in the article; derivatives continue until 3:40 p.m.
- Why
- SEBI sought a more democratic price-discovery process and aimed to reduce the ability to influence closing prices under the previous VWAP-based system.
Arguments Supporting CAS
Concerns About CAS
Price discovery
Arguments Supporting CAS
CAS allows participants to submit orders at prices of their choice, potentially making price discovery more democratic and reducing the influence of large trades at the close.
Concerns About CAS
The mechanism’s hidden matching process makes execution uncertain, and low participation can produce sharp price movements or divergence.
Implementation timing
Arguments Supporting CAS
SEBI adopted a closing-auction model used in developed markets after foreign institutional investors and global participants advocated it.
Concerns About CAS
Tejas Shah said India may not yet be mature enough for the system and suggested a longer simulation or parallel run before implementation.
Market structure
Arguments Supporting CAS
A separate auction can provide more flexibility than the previous system, in which traders had to transact at an already determined closing price.
Concerns About CAS
Keeping derivatives open until 3:40 p.m. while CAS ends by 3:30 p.m. creates a mismatch and limits hedging opportunities for larger participants.
Key facts
- Mechanism
- The Closing Auction Session, or CAS, is a special period used to determine closing prices.
- Normal trading ends
- Normal trading continues until 3:15 p.m.
- Order window
- Market and limit orders can be placed from 3:20 p.m. to 3:25 p.m.; only limit orders are allowed after 3:25 p.m.
- CAS close
- The session ends at a randomly selected time between 3:27 p.m. and 3:30 p.m.
- Derivatives trading
- Derivatives continue trading until 3:40 p.m., 10 minutes after the CAS ends.
- Current participation
- Volumes are thin because participants are adjusting to the new system and major trading firms have limited hedging visibility.
- Potential impact
- The system may increase volatility in mutual-fund net asset values, according to Shah.
