SEBI Proposes Close-Auction Session for Stock Closing Price

The market regulator, the Securities and Exchange Board of India (SEBI), has proposed adopting a close-auction session (CAS), an internationally recognized method, to calculate the closing price of stocks instead of the current volume-weighted average price (VWAP) system. This change comes amid growing concerns about the impact of increased passive investing, particularly during event-driven volatility, on investors due to differences in index tracking.

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Differences Between CAS and VWAP

Under the CAS approach, buyers and sellers submit price quotes, which are then used to determine an equilibrium price, ultimately becoming the closing price of a stock. In contrast, the VWAP system calculates the closing price by averaging the prices of trades executed in the last 30 minutes of the trading day, weighted by trade volume.

SEBI’s Consultation Paper

In a consultation paper released on December 5, SEBI proposed introducing CAS as a 15-minute session from 15:30 to 15:45 to determine the closing price for stocks in the equity cash segment. SEBI acknowledged that while VWAP provides a fair market-based closing price reflecting trading interest, it does not allow participants to execute trades directly at the closing price.

Challenges with VWAP

The regulator highlighted concerns from international passive fund managers regarding VWAP. Specifically, during events like index rebalancing or derivative expiry, the VWAP mechanism can cause significant price volatility and leave large orders unfulfilled. These issues amplify tracking errors for passive funds.

Proposed Implementation of CAS

SEBI suggests a phased rollout of CAS, starting with stocks that have derivatives available, ensuring sufficient liquidity for smooth operation. The CAS process would involve four stages:

• Reference Price Determination Period
• Order Input Period
• No Cancellation Period, including a randomly timed order entry cutoff.
• Final Trade Confirmation and Order Matching

This phased introduction aims to ensure a smoother transition and assess the mechanism's effectiveness in reducing volatility and improving market efficiency.