The Securities and Exchange Board of India (Sebi) on Saturday proposed sweeping changes to the closing auction session (CAS) framework, including two alternative methods for determining the settlement prices of index and single-stock derivative contracts on expiry days.
The proposals are part of a consultation paper issued after the regulator said last week that it would review the CAS mechanism and seeks views on expiry-day settlement prices, market timings, order handling and information dissemination.
Under the first option, the final settlement price would be based on a blended volume-weighted average price (VWAP) of trades executed during the last 30 minutes of the continuous trading session (CTS) and the 10-minute CAS. The weights assigned to the two sessions would not be predetermined but would depend on the actual traded value during each period.
The second option would retain the existing methodology of using the VWAP during the last 30 minutes of continuous trading to determine settlement prices. Trades executed during CAS would not be included in the calculation, making the methodology similar to the one followed before CAS was introduced in August.
Sebi proposed that the second methodology could continue for at least one year, after which it could transition to the blended VWAP framework based on the liquidity and participation seen in CAS and the familiarity of market participants with the auction mechanism.
The regulator said retaining the existing settlement methodology during the interim period would provide continuity and give market participants sufficient time to become familiar with CAS. However, it clarified that the arrangement would only be temporary, with blended VWAP being the intended long-term framework.
Sebi also sought to address sharp movements in the indicative index value during CAS. It noted that market participants had at times misconstrued the index value (IIV) as an actual level reached by the index, even though it was only an evolving indication derived from the indicative equilibrium prices (IEP) of constituent stocks.
Citing international practices, where indicative auction prices are typically disseminated for individual securities rather than the entire index, Sebi proposed discontinuing the dissemination of indicative index values during CAS. Instead, exchanges would disseminate actual index values, indicative prices of constituent securities and expected settlement prices during the relevant settlement-price determination window.
The regulator also noted that the closing price and settlement price of stocks in the futures and options segment could differ because of the different methodologies used to determine them.
Sebi further proposed reducing the transition period between continuous trading and CAS to one minute from five minutes, based on feedback from stock exchanges.
Under the first timing option, continuous trading in all stocks would continue until 3:30 pm, restoring the schedule followed before CAS was introduced. A 10-minute CAS, including the one-minute transition period, would then be conducted after 3:30 pm, while derivatives trading would remain open for five minutes after the auction and close at 3:45 pm.
Under the second option, CAS would take place between 3:15 pm and 3:25 pm, including the one-minute transition period, while derivatives trading would continue until 3:30 pm. Under both alternatives, reference prices for CAS would be based on trades executed during the last 15 minutes of continuous trading.
Sebi said the proposal to reduce the post-CAS derivatives trading window to five minutes from 10 minutes followed feedback that there was limited rationale for allowing trading in expiring contracts to continue once price discovery in the underlying security or index had been completed.
However, the regulator proposed retaining a smaller window to allow market participants to manage or reverse positions, particularly in single-stock derivatives, where they may not have been able to complete all desired transactions earlier.
Sebi also reviewed the existing 3% price band within which orders can be placed during CAS. While proposing to retain the band to give investors sufficient flexibility to express their views on the appropriate closing price, it suggested changes to the cancellation and modification of orders.
Limit orders placed within 1% of the reference price would be allowed to be cancelled or modified during CAS. Orders placed at or beyond 1% and up to the 3% limit would not be allowed to be cancelled, although they could be modified to improve their price within the prescribed band.
The regulator said the change is aimed at reducing significant withdrawals of trading interest at prices far from the reference price while allowing participants to improve their orders in response to evolving demand and supply.
Sebi also proposed allowing unexecuted iceberg orders from the continuous trading session to transition into CAS to improve auction liquidity and ensure that existing trading interest is included in the closing-price discovery process.
Iceberg orders are large orders divided into smaller portions, with only part of the total quantity disclosed to the market at a time. Currently, unexecuted iceberg orders do not transition into CAS because of the auction’s disclosure-based framework.
Under the proposal, such orders would enter CAS as normal limit orders, with their entire unexecuted quantity disclosed and made available for execution under the auction’s order-matching mechanism.
Sebi has sought comments from market participants on the proposals until October 3, 2026.