After facing teething issues in the closing auction session (CAS) introduced nearly three months back, the market regulator has decided to revert to the earlier method of determining settlement prices of derivative contracts. Kushan Shah explains how the new CAS framework will work
l What is CAS, and how does it take place now?
EFFECTIVE IN THE two Indian stock exchanges – BSE and NSE — from August 3, 2026, closing auction session (CAS) is a method to determine closing prices of stocks active in the derivatives market and the benchmark index along with settlement prices of index and stock derivative contracts on weekly and monthly expiry days.
Currently, the session starts at 3:15 PM, Mumbai time, on every normal trading day with a five-minute transition period in which a reference price is calculated for each stock using a volume-weighted average price (VWAP) of stocks based on trades executed between 3:00 pm to 3:15 pm. Market participants can place orders in a +/- 3% range of this reference price during the auction. During the auction, the exchanges determine the price at which maximum volume of orders can be matched, which becomes the closing price of the stock. The official closing price is published after the auction concludes.
Before August 3, equities traded from 9:15 am to 3:30 pm with the official close calculated as the VWAP of all trades executed during the final 30 minutes of the session.
THE NEW SYSTEM saw low participation in the cash market, which led to price swings when a large order was placed. In the derivatives market, these swings in the prices of underlying stocks and index led to high swings in the premiums of index and stock options on expiry days. This led to many out-of-money options (options contracts that currently have no intrinsic value) changing to in-the-money options (these have intrinsic value since the current market price of the underlying asset is favourable relative to the contract’s strike price) due to volatility and low liquidity. This resulted in unexpected settlements, which created assignment, delivery and funding obligations for investors buying these option contracts as well as option writers. The high unpredictability also led to arbitrageurs and proprietary traders avoiding trades during the closing auction.
IN ITS CIRCULAR published on October 15, the Securities and Exchange Board of India (Sebi) proposed modification of certain provisions of the existing CAS framework. These are based on an analysis of the comments received on the consultation paper released in September, recommendations of the Secondary Market Advisory Committee of Sebi, discussions with the stock exchanges and internal deliberations. In order to reduce the volatility in the derivative market, especially during expiry days, it decided to revert to the earlier method of determining settlement prices of derivative contracts on expiry days using VWAP during the last 30 minutes of continuous trading session. The transition period from continuous trading session to CAS was also reduced from 5 minutes to 1 minute. The entire closing auction duration has been reduced to 10 minutes from 15 minutes now. Further, the regulator also allowed unexecuted iceberg (large orders placed in smaller disclosed portions) and limit orders from continuous trading to transition into CAS. Most changes will take effect from December 7, 2026.
l How will the closing auction take place?
THE AUCTION WILL start at 3:30 pm with a 1-minute transition period during which the exchanges will transition from continuous trading to CAS and calculate the reference prices for stocks. This will be followed by a five-minute order entry period from 3:31 pm to 3:36 pm during which market participants will be able to place both limit and market orders. The exchanges will undertake order matching following this order entry period from 3:36 pm to 3:40 pm.
The market participants can place limit orders in this period. However, no modification or cancellation of market orders will be allowed during this period. The exchanges will have a random close during the two-minute period from 3:38 pm to 3:40 pm which will be system-driven. Exchanges will disseminate the closing price to market participants following the close. Meanwhile, the trading in stock derivatives will continue until 3:45 pm on all trading days, including expiry days. However, index derivatives will trade till 3:45 pm on all trading days except expiry days when they will stop trading at 3:30 pm.
l How will the orders get executed?
MARKET PARTICIPANTS CAN place only limit and market orders during the closing auction session (CAS), which will determine the equilibrium price. Unexecuted iceberg orders from continuous trading will automatically enter CAS as limit orders, with their entire quantity disclosed, unless participants opt out when initially placing them. These carried-forward iceberg orders will have lower time priority than regular limit orders transferred from continuous trading, meaning they will be matched later if prices are otherwise equal.
Fresh limit orders submitted during CAS will rank below both carried-forward limit and iceberg orders in time priority. Participants may also modify limit and iceberg orders transferred into CAS during the auction. Execution will depend on the equilibrium price and applicable order-priority rules, rather than submission time alone.