SEBI proposes new closing public sale session framework; to start with liquid by-product shares

Markets regulator, Securities and Exchange Board of India (SEBI), has proposed a brand new framework for the Closing Auction Session (CAS) within the fairness money market, beginning with extremely liquid by-product shares to find out the closing costs of shares.

The proposal, if carried out, is predicted to scale back volatility, enhance equity, and make it simpler for giant and passive buyers to execute trades.

In its session paper, SEBI proposed that CAS could be utilized in a phased method, starting with shares out there within the derivatives phase — these with adequate liquidity — and later prolonged to all shares based mostly on expertise gained.

A closing public sale session is a brief buying and selling interval held on the finish of the day to find out the ultimate value of a safety.

The regulator proposed that the session might be held individually for 20 minutes, from 3:15 p.m. to three:35 p.m., not like an earlier proposal that instructed conducting it after market hours, between 3:30 p.m. and three:45 p.m..

The session could be divided into 4 phases — reference value calculation, order entry, random shut, and last matching.

Index derivatives would proceed to shut at 3:30 p.m., whereas near-month inventory derivatives would shut at 3:35 p.m. on expiry days.

To keep orderly buying and selling, CAS will function inside a 3% up or down band of the reference value, decided utilizing the VWAP of trades between 3 p.m. and three:15 p.m..

Execution guidelines will even change, with market orders receiving precedence over restrict orders — not like within the pre-open session. Any unexecuted restrict orders from the continual session will mechanically transfer to CAS however can’t be modified, solely cancelled.

To improve transparency, SEBI has proposed the dissemination of real-time knowledge throughout CAS. This would come with the indicative equilibrium value, cumulative purchase and promote portions, and imbalance knowledge — each complete and particular to market orders — serving to individuals make better-informed choices.

However, SEBI additionally flagged a possible problem for passive mutual funds. On index rebalancing days, these funds might face destructive money balances after CAS trades, as they usually keep away from holding money to minimise monitoring errors. This might result in settlement difficulties.

To handle the problem, SEBI has instructed permitting passive mutual funds to borrow in a single day to satisfy short-term liquidity necessities arising from CAS trades. In December 2024, the regulator proposed introducing a CAS within the fairness money market to exchange the present Volume Weighted Average Price (VWAP) based mostly technique for figuring out closing costs of shares.

Taking into consideration the suggestions obtained from the stakeholders and subsequent deliberations within the SEBI’s Secondary Market Advisory Committee, a number of adjustments have been integrated within the proposed revised CAS design.

SEBI highlighted that knowledge suggests “CAS provides a more stable and less volatile closing price compared to the volatility often observed under a VWAP based closing price methodology, even when handling the same level of trading volume”.

VWAP-based closing can set off volatility on index rebalancing days, as massive trades executed within the last minutes are inclined to distort costs. On the opposite hand, CAS reduces such distortions by pooling all purchase and promote orders right into a single clear public sale, thereby making certain higher value discovery and execution for institutional buyers.

SEBI has sought public feedback until September 12 on the proposals.