New Delhi: SEBI (Securities and Exchange Board of India) has proposed a new framework, viz., the Closing Auction Session (CAS) for the equity cash market, in order to decide the better closing prices of shares. A closing auction session is a short trading period held at the end of the day to determine the final price of a security. The proposed framework will start with liquid derivative stocks (the most-traded big stocks) and will be expanding later to all stocks.
If implemented, the expected proposal is set to reduce the volatility in deciding the closing stock price, thereby making it easier for large and passive investors to execute trading activity.
SEBI, in its consultation paper, proposed that CAS would be applied in a phased manner. The system will be implemented first with the stock available in the derivatives segment because they are the ones with sufficient liquidity and later be extended to all types of stock based on the experimental results of this current phase.
The market watchdog has proposed that the session will be held separately for 20 minutes from 3:15 to 3:35 PM. Earlier it was proposed that the session be conducted after market hours between 3:30 pm and 3:45 pm.
How SEBI’s CAS will reduce stock price volatility
The session would include four phases – reference price calculation, order entry, random close, and final matching
SEBI said that the data supports CAS, as it “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 could trigger volatility on index rebalancing days, as large trades executed in the final minutes tend to distort the closing prices. On the other hand, CAS reduces such distortions. It pools all the buy and sell orders into a single transparent auction, thereby ensuring better price discovery and execution for institutional investors.
The SEBI has sought public comments on this proposed CAS framework till September 12.