Sebi Receives Over 20,000 Comments on Closing Auction Session Review

The Securities and Exchange Board of India (Sebi) has received more than 20,000 responses from market participants regarding its consultation paper on reforms to the closing auction session (CAS), market hours, and the methodology for settling derivatives contracts. This significant volume of feedback reflects widespread interest and concern over proposed changes, particularly from traders urging Sebi to maintain the current 30-minute continuous trading session (CTS) volume-weighted average price (VWAP) method before considering any transition to a blended pricing framework.

The consultation period has now concluded, and Sebi is expected to carefully analyze the extensive input before finalizing the revised framework for CAS. The regulator’s review focuses on the CAS mechanism introduced on August 3 for stocks with derivatives contracts, a change that sparked a notable drop in trading volumes within the futures and options (F&O) segments. The move came after traders raised concerns about the system’s impact and reports of potential manipulation during the CAS window.

Sebi’s consultation paper detailed two options for determining expiry-day settlement prices. The first proposed a blended VWAP, combining trades from the final 30 minutes of CTS and the 10-minute CAS. The alternative suggested continuing with the CTS-only VWAP for at least one year, allowing the CAS to build liquidity and develop its own price-discovery attributes before integrating its trades into the settlement process.

Feedback from traders, brokers, and other market participants has predominantly favored retaining the CTS-only VWAP temporarily. Many argued that this method is familiar, transparent, and well-understood operationally. They also emphasized that maintaining the status quo for a period would give CAS the opportunity to mature without disrupting existing settlement practices.

The Futures Industry Association (FIA), a global organization representing exchanges, clearing firms, and trading companies, submitted its response on October 3. The FIA strongly opposed the immediate adoption of the blended VWAP approach and supported the continuation of the CTS-VWAP as the interim methodology. The association highlighted the challenge that participants face in tracking settlement prices when weights between CTS and CAS are only known after the auction, while the CTS portion must be executed beforehand.

According to the FIA, this uncertainty complicates efforts by funds using index futures for portfolio hedging, arbitrageurs with perfectly hedged derivatives positions, and long-term investors who rely on derivatives for liquidity. The association also noted the lower trading volumes observed during CAS and recommended that any future move to blended VWAP should depend on meeting a clear liquidity threshold, ensuring sufficient auction participation before its prices are factored into derivatives settlement.

Regarding market timings, the FIA and other traders supported Sebi’s Option A, which proposes extending continuous trading for CAS stocks until 3:30 pm, followed by the auction, and keeping derivatives trading open until 3:45 pm. This adjustment aims to enhance price discovery and better align derivatives market closure with the end of the cash market’s closing activities.

However, the FIA disagreed with Sebi’s plan to halt dissemination of the indicative index value (IIV) during CAS. The organization argued that IIVs offer real-time insight into how closing prices form and assist in surveillance by enabling comparison between futures prices and the implied value of the underlying basket. Removing this data could diminish transparency without effectively addressing manipulation concerns.

Other proposals by Sebi included allowing unexecuted Iceberg orders to enter CAS after conversion into fully visible limit orders and reducing the transition time between continuous trading and CAS to one minute. The regulator also suggested prohibiting cancellation of limit orders placed beyond a 1 percent range of the reference price during CAS, while permitting only price-improving changes to such orders.

The extensive feedback from the market community highlights the importance of these reforms and the need for a balanced approach that supports liquidity, transparency, and fair price discovery. Sebi’s next steps will likely involve careful consideration of all viewpoints before implementing adjustments that impact the closing price formation and derivatives settlement processes in India’s equity markets.