The Securities and Exchange Board of India (SEBI) has released a consultation paper proposing a new framework for the Closing Auction Session in the equity cash market. This change, if implemented, will begin with highly liquid derivative stocks and gradually extend to all listed companies.
A closing auction session is a short trading period held at the end of the day to determine the final settlement price of a security. SEBI believes this method provides greater stability and fairness than the current volume weighted average price system, which often sees heavy volatility in the last few minutes of trade.
How the new session will function
Under the proposal, the closing auction session will run for 20 minutes between 3:15 pm and 3:35 pm. The process will include reference price calculation, order entry, random close, and final matching. The reference price will be calculated using the volume weighted average price of trades between 3:00 pm and 3:15 pm. To maintain stability, price movements will be restricted within a 3 percent band around this reference price.
Market orders will receive priority over limit orders in this session. Any unexecuted limit orders from the normal trading session will move automatically into the closing auction but cannot be modified, only cancelled. SEBI has also suggested that real-time data such as the indicative equilibrium price, cumulative buy and sell quantities, and order imbalances will be shared with market participants to enhance transparency.
For index derivatives, the closing will remain unchanged at 3:30 pm. However, near-month stock derivatives will close at 3:35 pm on expiry days.
Why this matters for investors
Large and passive institutional investors often face challenges in executing big trades without disturbing market prices. SEBI believes the auction system will allow such investors to transact in a fair and orderly manner by pooling all buy and sell orders into a single transparent process.
Currently, the reliance on VWAP methodology can result in volatility, especially on index rebalancing days when large volumes are executed in the last minutes of trade. The closing auction system is expected to reduce such distortions, providing a more stable closing price.
Challenges and possible solutions
While the new framework offers benefits, SEBI acknowledged that passive mutual funds may face short-term settlement issues. On index rebalancing days, these funds could end up with negative cash balances after auction trades since they typically avoid holding cash to minimise tracking errors. To address this, SEBI has suggested allowing such funds to borrow overnight to meet liquidity needs.
The regulator also noted concerns about operational risks and settlement adjustments but believes the phased introduction will allow adequate time for adjustments and feedback.
Next steps
SEBI has invited public comments on the consultation paper until September 12, 2025. Based on responses, the regulator will refine the framework and roll it out in stages.
This reform is part of SEBI’s broader effort to strengthen market infrastructure, encourage institutional participation, and build investor confidence through fairer price discovery mechanisms.
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