Days after the new Closing Auction Session (CAS) triggered sharp swings in the Nifty and sparked concerns among traders over unusual expiry-day movements, market regulator Sebi has defended the new mechanism, saying it is a “significant step in enhancing the robustness of India’s price discovery mechanism” and will help deliver more transparent and reliable closing prices.
The regulator’s remarks come as market participants continue to debate the impact of the auction-based closing mechanism, which went live earlier this week and has already led to sharp end-of-day movements in the Nifty, divergence between the Nifty and Sensex, and unexpected gains and losses for options traders.
The Closing Auction Session is a new mechanism introduced to determine the closing price of stocks with derivatives contracts.
Unlike the earlier system, where closing prices were based on trades executed during the final 30 minutes of regular market hours, CAS allows investors to place buy and sell orders during a dedicated auction window after the cash market closes. The final closing price is then determined through this auction process.
The mechanism was introduced with the objective of improving the quality of price discovery at market close and aligning India’s equity markets with global practices.
However, its rollout has not been without controversy.
In its first few days, the new system triggered sharp movements in the Nifty during the closing auction period, leaving many traders questioning whether they needed to rethink their trading strategies, particularly in the derivatives market.
Responding to the debate, Sebi has backed the new framework in its latest annual report.
The regulator described CAS as a “significant step in enhancing the robustness of India’s price discovery mechanism” and said the auction-based system is expected to produce a “more transparent, stable and reliable” closing price.
According to Sebi, the new mechanism strengthens the closing price discovery process by giving market participants a dedicated auction window to submit buy and sell orders, rather than relying solely on trades executed during the final minutes of continuous trading.
The regulator also pointed out that closing auctions are an established practice across several developed markets and said adopting a similar framework would improve efficiency and transparency in India’s equity markets.
Despite Sebi’s reassurance, the initial rollout has unsettled many market participants.
Since CAS was introduced, traders have highlighted concerns over sharp end-of-day price swings, differences between cash market closing prices and futures prices, and unexpected losses for options traders who had positioned themselves based on the earlier closing price mechanism.
The issue has been particularly significant for derivatives traders because options contracts are settled using the final closing value of the underlying index.
Even relatively small movements during the closing auction can significantly alter payouts for options contracts trading near key strike prices, forcing traders to rethink their expiry-day strategies.
Market participants have also questioned the behaviour of futures and spot prices during the auction period and whether the new framework could result in temporary pricing inefficiencies until traders fully adapt to the mechanism.
Early trading data suggests the impact of CAS has been far more pronounced on the Nifty than on the Sensex.
The average difference between the Nifty’s level at 3:30 pm and 3:15 pm during the first four trading sessions under CAS stood at around 0.42%.
The biggest move came on the first day of implementation, when the Nifty surged by more than 200 points during the closing auction. The index gained over 150 points on the second day, around 50 points on the third day and roughly 9 points on the fourth day. Closing auction turnover in Nifty stocks stood at around Rs 1,433 crore on Thursday.
The Sensex, meanwhile, experienced comparatively smaller movements.
Its average difference between 3:15 pm and 3:30 pm over the same four trading sessions was around 0.10%, while turnover during Thursday’s closing auction stood at approximately Rs 127 crore.
The difference has prompted market participants to examine whether higher liquidity, derivatives participation and index composition are contributing to the larger movements seen in the Nifty.
While acknowledging the market’s adjustment to the new mechanism, Sebi has maintained that the objective of CAS is not to manage short-term price movements.
Instead, the regulator said the focus is on improving the quality of closing prices by making them more transparent, reliable and efficient.
According to Sebi, the success of the new framework should ultimately be judged by whether it creates a stronger and more robust price discovery process as market participants gradually adapt to the auction-based closing mechanism.
For now, however, traders are expected to keep a close watch on how the new closing auction influences volatility, particularly on weekly and monthly derivatives expiry days, when even small changes in the final closing price can have a significant impact on options settlements.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)