SEBI Closing Auction Session draws trader backlash as liquidity concerns persist

Mumbai: The newly-introduced closing auction system (CAS) has drawn sharp criticism from traders, who are irked by the unpredictability of recent index and stock price moves and the resulting losses.Calls for changes to the mechanism or, even a temporary rollback, have gathered pace on social media, prompting the Securities and Exchange Board of India and exchanges to convene a meeting with top brokers even as the authorities defended the framework.The regulator is believed to have told brokers that it has no plans to change the CAS for now and urged them to encourage more traders to participate in the mechanism. An email sent to Sebi went unanswered till the time of going to printAt the centre of the controversy is the regulator's decision to overhaul the way closing prices of 200-odd stocks in the futures and options (F&O) segment are determined, which traders say has caused unusually wide divergences between Sensex and Nifty and futures and options trades going awry.Read more: Foreign borrowings hit over $6 billion in June as 140 firms tap global market"The biggest problem under the CAS is that traders are unable to understand what the closing prices will be because there is a lot of randomness in the system," said Piyush Chaudhry, founder of Mumbai-based Wave Analytics.Professional traders use factors such as order flows, liquidity, derivatives positions and historical trading patterns to estimate price directions-key to successful trading. Sharp deviations from those expectations can cause trading strategies to misfire, resulting in unexpected gains or losses.Options traders have taken the biggest hit in the closing auction system. For traders like Aakanksha Gupta, the closing auction mechanism has put her in a blind spot as she is unable to assess where the Nifty is likely to close."As an options seller, I rely on the live Nifty spot level to execute trades throughout the day. Since CAS was introduced, cash market trading ends at 3.15 pm , but the F&O eligible stocks continue to trade," said Mumbai-based Gupta, a Sebi-registered research analyst. "We build strategies around the prevailing spot level, only to find the index repricing sharply when trading resumes, turning profitable positions into losses.Both indices have witnessed rollercoaster rides in the past three days. On Wednesday, the Sensex was down 0.2% and the Nifty had fallen 0.5% at their intraday lows. At close, the Sensex ended 0.19% higher, while the Nifty closed almost flat."Over the past two days, we've seen a significant gap between the reference price during the CAS and the final indicative closing price, because large orders can influence the indicative price," said Aditya Pachwaria, founder, Fintoric Capital.Wild SwingsShikha Pruthi Gupta, a Faridabad, NCR-based full-time trader, said a profitable trade at 3.15 pm can unexpectedly turn into a loss because of the lack of visibility into where the index will finally settle.One key criticism voiced by traders is the 3% price band within which the auction price is generally allowed to move, measured on the basis of the stock's average traded price between 3.00 and 3.15 pm."How can you have a +/- 3% range for stock prices in the auction process; that itself is a random number and has no connection to what the market's behaviour was for the day," said Chaudhry. "This methodology is highly questionable and has no statistical basis."Algorithmic trading has been among the biggest casualties of the new mechanism, with professional traders saying their models have struggled to anticipate the sharp and unexpected price moves seen over the past three days. This is because many algorithms were designed around historical closing price patterns rather than an auction-driven market close.The new closing auction process lasts about 20 minutes, from 3.15 pm to around 3.35 pm. During this period, the exchange first collects buy and sell orders and then matches them to determine a single official closing price for the stock. Under the previous system, a stock’s closing price is based on the average price of trades done in the last 30 minutes, between 3 pm and 3.30 pm.The difficulty in predicting closing prices has disrupted traders’ risk-management systems, prompting many, such as Pachwaria, Gupta and Chaudhry, to stay on the sidelines. Since many of them trade with leverage, unexpected moves near the close can magnify losses, making it harder to manage risk.“Many traders, including me, are observing rather than trading because even algos cannot work in this environment,” said Chaudhry.

The Securities and Exchange Board of India (SEBI) has no immediate plans to revise the newly launched Closing Auction Session (CAS) framework and will continue monitoring its implementation. According to a report by Moneycontrol, SEBI believes there are no issues with the design or technical structure of CAS and is not considering any modifications at this stage. The regulator’s focus is currently on increasing participation in the auction process and helping market participants adjust to the new mechanism.SEBI Chairman Tuhin Kanta Pandey held discussions with market participants and brokers on Tuesday. Markets Snap Four-Day Winning Streak, Sensex Falls 210 Points As New Closing Auction Triggers Volatility Although the meeting was scheduled to discuss another matter, the newly introduced CAS framework also came up during the discussions. The conversation focused mainly on improving participation levels in the closing auction.According to the sources cited in the report, SEBI considers wider participation critical for the success of CAS. The regulator noted that participation improved on the second day of implementation compared with the first day, and expects liquidity in the auction window to strengthen further over time.SEBI believes that increased participation will help reduce the sharp price movements witnessed during the initial sessions. The regulator has also encouraged traders to make better use of the indicative equilibrium price displayed during the auction period to place orders more effectively. The Closing Auction Session was introduced on August 3, replacing the earlier Volume Weighted Average Price (VWAP)-based method for determining closing prices of stocks with active futures and options contracts. Under CAS, buy and sell orders are matched through an auction mechanism to arrive at a single closing price.SEBI introduced the reform after studying closing auction practices followed by major global exchanges. The regulator believes the system will improve price discovery, bring more liquidity into a single closing window, support execution of large institutional orders and increase transparency, as closing prices influence derivatives settlement, index calculations and mutual fund net asset values.

The implementation of the Securities and Exchange Board of India’s (SEBI) new Closing Auction Session (CAS) has reignited a long-standing debate between global investors and domestic market participants over whether India’s equity markets have enough depth and liquidity to support an auction-based closing mechanism.The first day of CAS saw a sharp divergence in benchmark closing prices, raising concerns that were highlighted during months of consultations before the reform was introduced. According to sources cited in a report by Moneycontrol, global passive investors were among the strongest supporters of the move, as they wanted India to adopt international market practices and allow funds to execute trades at the same prices used for benchmark index calculations. This, they argued, would reduce tracking errors for index funds. Sensex Jumps 500 Points, Nifty Slips 200 Points After Closing Auction Rally Fades However, domestic institutions, brokers, exchanges and traders had expressed reservations. As per the report, they argued that India’s market structure lacked the institutional participation and two-way liquidity required for an auction system to consistently deliver efficient price discovery.Under the earlier Volume Weighted Average Price (VWAP) system, the official closing price was calculated based on trades executed during the final 30 minutes of regular trading. While this method worked effectively, passive investors could not execute trades at the exact price used for index calculations. The CAS framework attempts to address this issue by bringing together buy and sell orders during a dedicated closing session. A single equilibrium price is then discovered at which the maximum number of shares can be matched. The system is similar to closing auctions used in several global markets.The proposal went through two rounds of public consultation and multiple meetings involving exchanges, brokers, mutual funds, arbitrageurs and institutional investors. According to participants, there was never complete agreement on the reform. Sensex, Nifty Rally For Fourth Straight Session, Lower Crude Oil Prices And IT Stocks Lift Market Sentiment Supporters of the previous system argued that the VWAP mechanism was already functioning efficiently. Some mutual fund industry participants pointed out that Indian index funds already had among the lowest tracking errors globally because fund managers were able to execute large trades effectively during the last 30 minutes of trading.The primary concern raised against CAS was not the concept itself but whether India had sufficient participation to make it work smoothly. Market participants warned that a thinly populated auction could allow relatively small order imbalances to significantly influence closing prices, resulting in technically valid but economically unreliable outcomes.Concerns were also raised over major market events such as index rebalancing, MSCI changes and derivatives expiry, when institutional activity generally rises sharply near closing time.SEBI responded by highlighting exchange data showing that nearly 90% of institutional activity during index rebalancing days already takes place in the final 30 minutes of trading. The regulator argued that shifting these orders into an auction would not significantly alter liquidity patterns.Another issue involved derivatives markets. Participants feared that while cash-market prices would be determined through CAS, futures contracts would continue trading, potentially creating temporary price differences. To address this, SEBI directed exchanges to publish an indicative equilibrium price throughout the auction session, providing traders with a reference point.Some arbitrage funds also expressed concerns that the new mechanism would remove opportunities created by closing-price inefficiencies. However, SEBI maintained that preserving such inefficiencies could not be a regulatory objective.SEBI Appoints Prasanta Mahapatra As Executive Director To Head Corporation Finance Investigation, Recovery Departments Critics of the reform had earlier warned that without adequate participation, CAS could produce closing prices that were formally accurate but economically unreliable. Following the first day of implementation, several heavyweight Nifty stocks closed significantly above their 3:15 pm prices, pushing the benchmark index sharply higher and creating divergence with the Sensex and futures markets.While some market participants viewed the movement as an initial adjustment phase that would stabilise as participation improves, others said it validated their earlier concerns about liquidity.The debate has now shifted from whether closing auctions represent global best practice to whether India’s institutional ecosystem is mature enough to support the mechanism effectively.BSE Launches Closing Auction Session, Over 400 Trading Members Participate Across 200 Stocks According the report by Moneycontrol, Association of NSE Members of India (ANMI) National President Kamlesh Shroff said the brokers’ body is working with exchanges and SEBI by providing industry feedback and suggestions to strengthen the framework. He noted that every new market mechanism requires time to evolve and said CAS should be evaluated carefully to identify practical challenges and areas for improvement.