SEBI May Revise Closing Auction Session Rules

The Securities and Exchange Board of India (SEBI) is likely to release a consultation paper on the Closing Auction Session (CAS) framework, with potential changes focused on how settlement prices of derivative contracts are determined on expiry days.

The proposals could be taken up at the SEBI board meeting on September 24, following concerns raised by market participants over sharp price movements during the newly introduced closing auction mechanism.

SEBI Chairman Tuhin Kanta Pandey has previously indicated that CAS is here to stay, while acknowledging that concerns raised by market participants are being examined.

The CAS was introduced on August 3 and ends continuous trading in futures and options-eligible stocks at 3:15 pm. These securities then enter an auction lasting roughly 20 minutes, during which buy and sell orders are matched to establish the official closing price.

The new mechanism has drawn attention following unusually sharp movements during derivatives expiry sessions. During a recent session, the indicative Sensex closing level briefly dropped around 2.5%, triggering a roughly 400-500% surge in some put option premiums during the closing auction.

Market participants have raised concerns that limited liquidity in the auction could allow a relatively small number of orders to exert significant influence on closing prices. Analysts also believe CAS has made expiry-day execution more difficult to predict for systematic options strategies.

Any proposed changes to the SEBI CAS framework are therefore expected to focus on improving settlement-price reliability while preserving the closing auction mechanism itself.

The regulator is not expected to withdraw the Closing Auction Session, but instead refine the methodology used to calculate settlement prices for derivatives during expiry sessions.

The move is seen as an effort to address the concerns of market participants while maintaining the integrity of the CAS framework.

In the context of the Indian stock market, the CAS framework is an important component of the trading mechanism, and any changes to it are likely to have a significant impact on market participants.

The SEBI's decision to revisit the CAS framework is a testament to its commitment to ensuring the stability and efficiency of the Indian stock market.

Overall, the potential changes to the CAS framework are likely to be closely watched by market participants, and their impact on the Indian stock market will be keenly observed in the coming days.