Capital markets regulator SEBI has defended the new Closing Auction Session (CAS) mechanism in its latest annual report, stating it offers better price discovery and execution certainty than the earlier VWAP-based system. According to The Economic Times, SEBI explained that the mechanism was introduced to align the determination of closing prices in the equity cash segment with global practices while ensuring fair, equal, and transparent access to all categories of investors. "This strategic transition marks a significant step in achieving cross-market consistency and enhancing the robustness of India's price discovery mechanism," SEBI stated in its annual report. "This growth, coupled with the rising weight of Indian stocks in global indices like MSCI and FTSE, where they command weights between 12 per cent and 30 per cent, has intensified the demand for precise execution at closing prices to minimize tracking errors," said SEBI. The regulator added that India's reliance on the volume-weighted average price (VWAP) methodology had historically led to intraday price swings and volatility, particularly during index rebalancing, as the market struggled to absorb large institutional flows in real time.
Concerns are mounting among traders regarding the recent shift to a closing auction system (CAS), which has led to significant price volatility and unexpected losses. According to The Economic Times, calls for changes to the mechanism or even a temporary rollback have gathered pace on social media, prompting the Securities and Exchange Board of India and exchanges to convene a meeting with top brokers. On Wednesday, the Sensex was down 0.2% and the Nifty had fallen 0.5% at their intraday lows, but at close, the Sensex ended 0.19% higher while the Nifty closed almost flat. The difficulty in predicting closing prices has disrupted traders' risk-management systems, prompting many to stay on the sidelines. "Many traders, including me, are observing rather than trading because even algos cannot work in this environment," said Piyush Chaudhry, founder of Mumbai-based Wave Analytics. "The biggest problem under the CAS is that traders are unable to understand what the closing prices will be because there is a lot of randomness in the system," Chaudhry added. Traders have raised concerns over sudden end-of-day price swings, and differences between index closing levels and futures prices.
Business Standard has published an editorial calling for a review of the newly introduced Closing Auction Session (CAS) mechanism, citing concerns over liquidity, price discovery and its impact on investors. The editorial notes that "the new closing auction session has triggered price divergences in F&O stocks, raising concerns over liquidity, price discovery and its impact on investors" and emphasizes that "if the CAS is unable to deliver the desired results despite its global acceptability, the regulator and stock exchanges must not shy away from acknowledging the shortcomings, and take appropriate corrective action." The editorial suggests that "it is possible that the Indian market is not yet prepared for the transition and the idea can be revisited after a reasonable gap" to ensure legitimate market participant interests are not compromised. This adds significant weight to the growing trader backlash and calls for regulatory intervention, with the latest editorial cautioning that regulators should remain open to revisiting the framework if it continues to produce distortions.
Options traders have taken the biggest hit in the closing auction system, with the mechanism putting them in a blind spot as they are unable to assess where the Nifty is likely to close. Late-session volatility in the new order-matching window can abruptly flip options from out-of-the-money to in-the-money, leaving traders unaware of stock delivery obligations until settlement finishes. "As an options seller, I rely on the live Nifty spot level to execute trades throughout the day. Since CAS was introduced, cash market trading ends at 3.15 pm, but the F&O eligible stocks continue to trade," said Aakanksha Gupta, a Mumbai-based Sebi-registered research analyst. "We build strategies around the prevailing spot level, only to find the index repricing sharply when trading resumes, turning profitable positions into losses." The upcoming monthly stock option expires on August 25 for the NSE and August 27 for the BSE will serve as the first key test for the new mechanism, with market experts warning that traders caught short on underlying stock during an unexpected ITM assignment may have to deliver shares at a much higher premium the next day.
Algorithmic trading has been among the biggest casualties of the new mechanism, with professional traders saying their models have struggled to anticipate the sharp and unexpected price moves seen over the past three days. This is because many algorithms were designed around historical closing price patterns rather than an auction-driven market close. "Over the past two days, we've seen a significant gap between the reference price during the CAS and the final indicative closing price, because large orders can influence the indicative price," said Aditya Pachwaria, founder, Fintoric Capital. "How can you have a +/- 3% range for stock prices in the auction process; that itself is a random number and has no connection to what the market's behaviour was for the day," said Chaudhry. "This methodology is highly questionable and has no statistical basis."
Under the revised schedule, regular trading for F&O-eligible stocks will continue until 3.15 pm, followed by a transition period lasting until 3:20 pm. The Closing Auction Session will then commence with the first order entry phase from 3:20 pm to 3:25 pm, followed by a second order entry phase from 3:25 pm to 3:30 pm, during which investors will not be permitted to modify or cancel market orders. The auction will conclude randomly within the final two minutes of this phase. The price discovered through the Closing Auction Session will become the official closing price for F&O-eligible stocks. Unlike the VWAP approach, which averages trades executed during the last 30 minutes of the continuous trading session in the cash segment, CAS concentrates liquidity into a single and transparent auction. By allowing all buy and sell interests to interact simultaneously, the mechanism facilitates the formation of a single equilibrium price based on the maximum matching of supply and demand. The new closing auction process lasts about 20 minutes, from 3:15 pm to around 3:35 pm. During the first five minutes (3:20 pm to 3:25 pm), investors can place both market and limit orders, while from 3:25 pm to 3:30 pm, only limit orders are accepted. The NSE clarified that CAS operates as a separate 20-minute session from 3:15 pm to 3:35 pm on every trading day, with the first 5 minutes (3:15 pm to 3:20 pm) given for Reference price calculation/Transition from CTS to CAS, followed by 5 minutes (3:20 pm to 3:25 pm) for order entry with both market and limit orders permitted, and from 3:25 pm to 3:30 pm, investors can enter only limit orders with market orders not modifiable or cancellable. Implemented from Monday, August 3, 2026, the new framework applies only to cash market stocks that have derivative contracts, with the existing volume-weighted average price (VWAP)-based methodology continuing for all other stocks.
Zerodha Founder and CEO Nithin Kamath has defended the Closing Auction Session mechanism, stating that structural issues rather than the framework are behind recent market volatility. In a post on X, Kamath wrote that "CAS itself is not a bad idea. Most large global markets have some form of closing auction." He explained that "A large amount of institutional activity, especially from passive funds..." is driving the need for such mechanisms. Kamath emphasized that "CAS is a globally accepted mechanism designed to improve price discovery and facilitate the execution of large institutional orders without causing abrupt price movements." This industry support comes as SEBI continues to urge brokers to encourage greater participation by retail investors in the newly introduced closing auction session, with the regulator conveying this message during meetings with brokers on Tuesday, ahead of the second day of trading under the new framework. Broking industry body ANMI also urged caution against drawing conclusions from the first two sessions, with Kamlesh Shroff, ANMI's President, saying every new market mechanism requires time to evolve and that the CAS is a globally accepted framework.
