India's securities regulator is retreating from its controversial closing auction framework just five weeks after implementation, following severe market volatility and investor backlash. After only five weeks of teething troubles and loud howls of protest, one of the biggest reforms in India's capital markets in recent years risks being watered down — if not entirely jettisoned. In early August, SEBI directed local bourses to discover end-of-day prices via a final 20-minute auction, but the system quickly unraveled with intraday trends reversing abruptly during the auction window — stocks strongly green at 3:15 p.m. plunged deep into the red by 3:30 p.m., and vice versa. Option volatility exploded, and local investors decried the system as unworkable, prompting SEBI to lose confidence in its own reform. The regulator has released a new consultation paper offering two options: either shorten the auction to minimize its impact, or strip it from derivative settlement for at least a year and return to a 30-minute trading average.
The market-wide average daily contracts traded in derivatives fell 23% in August to about 224 million, the lowest in 13 months, as regulatory changes including higher securities transaction tax (STT) and enhanced collateral requirements took full effect. Equity futures ADT slipped 9.9% month-on-month and 17.3% year-on-year to ₹1.22 trillion in August, marking a 33-month low, while equity options premium turnover moderated considerably, falling 15.7% sequentially and 10.6% year-on-year to ₹42,332 crore. The regulator also rolled out the closing auction session in the first week of August, and the market is yet to adjust to the change, which has had a big effect on options trading. Average daily turnover in the equity cash segment fell 0.6% month-on-month to ₹1.2 trillion in August, while average daily premium trading values for index options also fell 43% to a four-year low, pointing to broad-based cooling in index derivatives activity. For the exchanges, the impact was clear: In August, the daily notional turnover for futures and options on the National Stock Exchange of India Ltd., the nation's leading bourse, hit an 18-month low, while shares of listed BSE Ltd. posted their worst monthly loss in a year as the daily notional turnover fell to the lowest since July 2025.
SEBI's proposal to overhaul the Closing Auction Session (CAS) has drawn mixed responses from market experts, with significant divisions emerging over the proposed methodology for settling derivative contracts. Venkatachalam Shunmugam, former head of research and administration at MCX, questioned whether the transition period is necessary, stating that derivatives traders are likely to prefer continuous-trading prices as they allow better risk management than CAS. According to The Financial Express, Shunmugam noted that while a shift towards CAS may eventually be necessary, a one-year transition may not be sufficient unless SEBI takes steps to deepen liquidity in the auction session, requiring greater participation from arbitrage funds and foreign portfolio investors (FPIs) including through the stock lending and borrowing mechanism (SLBM). Chandan Taparia, head of derivatives and technicals at Motilal Oswal Financial Services, however, favoured moving directly to the blended VWAP methodology, stating that the consultation paper makes it clear that SEBI intends to persist with CAS, and delaying the blended methodology by a year may serve little purpose. Kruti Shah, a quantitative analyst at Equirus Securities, noted that the proposals are broadly positive for the market infrastructure ecosystem, stating that the changes should make the closing process more orderly and reduce uncertainty around price discovery and expiry-day trading, benefiting exchanges and intermediaries other than market makers.
Traders are showing preference for SEBI's proposed blended volume weighted average price (VWAP) mechanism combining the last 30 minutes of continuous trading (CTS) with CAS trades, over the existing CTS-only VWAP methodology. A few brokers and regulatory experts have indicated a preference for retaining the last 30-minute CTS VWAP for settlement rather than shifting immediately to blended VWAP, describing it as familiar, transparent and operationally well understood. The regulator has floated two options for derivatives settlement — the blended VWAP mechanism or continuing with the existing 30-minute CTS-only VWAP for at least a year before any transition. SEBI said a subsequent move to blended pricing could be considered no earlier than one year after the revised settlement method takes effect, with the transition not being automatic. The blended VWAP methodology would calculate settlement prices using trades executed during the last 30 minutes of CTS and the 10-minute CAS period, with contribution based on actual traded value with no predetermined weighting. Under the blended approach, if 90% of the total traded value comes from the last 30 minutes of CTS and 10% from CAS, the two periods would contribute in that proportion to the settlement price. Giving a greater weight to the 30-minute VWAP window would help keep the final price closer to that during the regular session, potentially restoring trust and encouraging trading, with listed brokers and capital-market companies including Motilal Oswal Financial Services Ltd., Angel One Ltd. and Billionbrains Garage Ventures Ltd. likely to benefit.
SEBI has introduced several proposals to address liquidity concerns and improve market efficiency during CAS. The regulator has proposed allowing unexecuted quantities from Iceberg orders to move into CAS as normal limit orders, with the entire pending quantity disclosed in the auction order book. As per Business Standard, this ensures that eligible trading interest outstanding at the end of continuous trading can participate in the closing auction and that the quantity available for execution is fully reflected in the auction order book. SEBI has also proposed prohibiting cancellations where limit orders are placed or modified beyond 1% on either side of the reference price, with price-improving modifications remaining permitted within the unchanged overall band of ±3%. The exchange would also stop disseminating indicative index values during CAS, while continuing to publish security-level indicative equilibrium prices. SEBI has also proposed stopping the dissemination of the Indicative Index Value (IIV) during CAS while continuing to provide Indicative Equilibrium Prices (IEPs) for individual securities. Market makers could face stricter constraints as the regulator suggested restrictions to cancellation orders, with potential changes that would restrict their ability to cancel orders when prices move by more than 1% during the auction, leaving them stuck with orders placed at outdated prices and increasing the risk of losses if the market shifts before the auction closes.
SEBI is seeking feedback on the suggestions by October 3, providing market participants with a clear timeline for providing input on the proposed reforms. The closing auction system introduced on August 3 was meant to improve end-of-day prices and align India with other major global bourses, but instead led to unexpected wild moves at the end of the trading day, both in the equities and derivatives markets, as well as during last month's MSCI Inc. index rebalancing. The episodes fueled concerns over thin liquidity, the potential for investors to influence closing prices and the difficulty of managing large positions during the short auction window, with calls quickly growing louder for a review of the mechanism that affected well-established trading strategies. A short no-cancellation period before matching may be a better solution, according to Ravi Varanasi, founding partner at SPVR Consultants and former business head at the NSE, who added that the move aimed at making displayed orders more meaningful and limiting the ability of participants to rapidly pull liquidity could make firms more cautious about displaying liquidity in the first place.
