The implementation of the Securities and Exchange Board of India’s (SEBI) new Closing Auction Session (CAS) has reignited a long-standing debate between global investors and domestic market participants over whether India’s equity markets have enough depth and liquidity to support an auction-based closing mechanism.
The first day of CAS saw a sharp divergence in benchmark closing prices, raising concerns that were highlighted during months of consultations before the reform was introduced.
According to sources cited in a report by Moneycontrol, global passive investors were among the strongest supporters of the move, as they wanted India to adopt international market practices and allow funds to execute trades at the same prices used for benchmark index calculations. This, they argued, would reduce tracking errors for index funds.
However, domestic institutions, brokers, exchanges and traders had expressed reservations. As per the report, they argued that India’s market structure lacked the institutional participation and two-way liquidity required for an auction system to consistently deliver efficient price discovery.
Under the earlier Volume Weighted Average Price (VWAP) system, the official closing price was calculated based on trades executed during the final 30 minutes of regular trading. While this method worked effectively, passive investors could not execute trades at the exact price used for index calculations.
The CAS framework attempts to address this issue by bringing together buy and sell orders during a dedicated closing session. A single equilibrium price is then discovered at which the maximum number of shares can be matched. The system is similar to closing auctions used in several global markets.
The proposal went through two rounds of public consultation and multiple meetings involving exchanges, brokers, mutual funds, arbitrageurs and institutional investors. According to participants, there was never complete agreement on the reform.
Supporters of the previous system argued that the VWAP mechanism was already functioning efficiently. Some mutual fund industry participants pointed out that Indian index funds already had among the lowest tracking errors globally because fund managers were able to execute large trades effectively during the last 30 minutes of trading.
The primary concern raised against CAS was not the concept itself but whether India had sufficient participation to make it work smoothly. Market participants warned that a thinly populated auction could allow relatively small order imbalances to significantly influence closing prices, resulting in technically valid but economically unreliable outcomes.
Concerns were also raised over major market events such as index rebalancing, MSCI changes and derivatives expiry, when institutional activity generally rises sharply near closing time.
SEBI responded by highlighting exchange data showing that nearly 90% of institutional activity during index rebalancing days already takes place in the final 30 minutes of trading. The regulator argued that shifting these orders into an auction would not significantly alter liquidity patterns.
Another issue involved derivatives markets. Participants feared that while cash-market prices would be determined through CAS, futures contracts would continue trading, potentially creating temporary price differences. To address this, SEBI directed exchanges to publish an indicative equilibrium price throughout the auction session, providing traders with a reference point.
Some arbitrage funds also expressed concerns that the new mechanism would remove opportunities created by closing-price inefficiencies. However, SEBI maintained that preserving such inefficiencies could not be a regulatory objective.
Critics of the reform had earlier warned that without adequate participation, CAS could produce closing prices that were formally accurate but economically unreliable.
Following the first day of implementation, several heavyweight Nifty stocks closed significantly above their 3:15 pm prices, pushing the benchmark index sharply higher and creating divergence with the Sensex and futures markets.
While some market participants viewed the movement as an initial adjustment phase that would stabilise as participation improves, others said it validated their earlier concerns about liquidity.
The debate has now shifted from whether closing auctions represent global best practice to whether India’s institutional ecosystem is mature enough to support the mechanism effectively.
According the report by Moneycontrol, Association of NSE Members of India (ANMI) National President Kamlesh Shroff said the brokers’ body is working with exchanges and SEBI by providing industry feedback and suggestions to strengthen the framework.
He noted that every new market mechanism requires time to evolve and said CAS should be evaluated carefully to identify practical challenges and areas for improvement.