CAS is here to stay: SEBI confident that Closing Auction Session will improve as participation rises, despite market-wide confusion

For much of the first week of trading under the new auction system to set closing stock prices, traders were convinced that one of the most consequen tial market structure reforms in years was faltering. As calls grew louder for the mechanism to be rolled back, the markets regulator met with some of the nation’s top stock brokerages and delivered a clear message: the Closing Auction Session (CAS) is here to stay. Senior officials at the Securities and Exchange Board of India (Sebi), including board member K. V. R. Murty, told market players the new system is just facing teething issues in its early days and that the regulator remains con fident that it will improve as participation rises, according to people familiar with the discussions, who asked not to be iden tified because the talks were private.

The discussions came after the first two trading sessions—including last Tuesday’s expiry on the National Stock Exchange (NSE)—under the new system produced unexpected swings that led to market-wide confusion. Brokerages were fielding questions from clients, while re tail investors took to social media as they struggled to understand why official clos ing prices appeared disconnected from the day’s trading.

Proposed in 2024

The new price-setting method, covering more than 200 stocks with listed deriva tives, was first proposed by Sebi in 2024 after major index-tracking funds sought a closing auction to reduce tracking errors. It is designed to improve price discovery and align India’s market structure with major global exchanges, according to the regulator.


Sebi has urged brokerages to speed up technology upgrades and boost order flow so the auction could operate as intended. A spokesperson for Sebi didn’t respond to an email seeking comment.

Much of the volatility is probably driven by weak participation. Many proprietary trading firms and high-frequency traders, which provide liquidity on expiry days, either stayed away from the auction or reduced activity as the new system settled in.

“Allowing some time for liquidity to develop before shifting to closing auction may have facilitated a smoother transi tion,” said Mayank Sachan, CEO, Zenskar Research. The proprietary trading firm has reduced its expiry-day strategies tied to index options, he said.

The lack of participation left liquidity thinner than expected, Goldman Sachs Group said in a note to clients. As a result, modest buy and sell orders were able to move the equilibrium price by much more than traders were used to seeing. The official closing price is used to set tle stock and index derivatives, making those swings significant. “Every devel oped market has a closing auction. We just got there before the liquidity did,” said Bhautik Ambani, CEO of AlphaGrep Mutual Fund, a unit of the quantitative trading firm AlphaGrep.

Volume hit

The disruption is already raising con cerns about broker earnings. Zerodha Broking estimates the change could trim industry-wide revenue by 1% to 5%. Jefferies sees a bigger impact, estimating that a 10% to 20% decline in expiry-day contracts could translate into a 5% to 10% drop in overall options volumes.

The changes could also impact the IPO bound NSE, which gets a significant share of its revenue from derivatives. Trading in equity futures and options on the nation’s largest bourse had already hit a 17-month low in July after the central bank tight ened funding rules.

The effect was pronounced in the first two sessions. Last Monday and Tuesday, the CAS erased part of the NSE Nifty 50 Index’s losses, lifting the official closing level above where the benchmark stood when continuous trading ended at 3:15 p.m. local time. That gap has narrowed sharply since, as more market players have responded to the regulator’s push.

Last Thursday, the first weekly expiry for the BSE Sensex under the new closing price methodology passed largely without disruption, with the benchmark ending 0.2% above its 3:15 p.m. level