The Securities and Exchange Board of India (SEBI) has proposed a revised framework for its Closing Auction Session (CAS) in the equity cash market, including the timing, structure and applicability.
SEBI had proposed the auction framework in December to determine stock closing prices, replacing the current Volume Weighted Average Price (VWAP) method, which does not allow trades at the exact closing price.
20-mte session
Under the revised plan, the closing auction is expected to be a 20-minute session from 3.15 to 3.35 pm, instead of the originally proposed 3.30 to 3.45 pm. This will see four sub-sessions for order entry, matching, and confirmation.
The price band during the order input and random closing session has also been suggested to be narrowed to ±3 per cent from the reference price instead of ±5 per cent proposed earlier.
With the change in timings of CAS, the time period for calculating the reference price based on VWAP has also been cut to 15 minutes from the current 30-minute window. Accordingly, the reference price is suggested to be based on the VWAP of the last 15 minutes from 3:00-3;15 pm of the continuous trading session (CTS).
Index rebalancing
With CAS, the regulator aims to reduce volatility, particularly during index rebalancing and derivatives expiry, and bring India’s closing price mechanism in line with global markets. SEBI has invited public feedback by September 12.
The consultation paper has also proposed permitting passive mutual funds to undertake overnight borrowing to meet the liquidity requirements arising out of any net negative cash balances on account of the trades undertaken in CAS.
The draft paper noted that passive investments through MFs and FPIs has seen significant growth with assets under management close to ₹30 lakh crore at the end of July.
For NAV stability
CAS provided a more stable and less volatile closing price compared to the volatility often observed under VWAP based closing price methodology, where large institutional trades executed towards the end of the VWAP calculation window, could create sharp intraday price swings as the market absorbed these flows in real time.
Under the revised proposal CAS would be applicable only to the stocks that are available for trading in derivative segment, and then based on the experience gained may be extended to all stocks at a later stage.