Closing Auction Session: Why Sebi says the new framework is better than VWAP

Amid mounting concerns from traders over the Closing Auction Session (CAS), capital markets regulator the Securities and Exchange Board of India (Sebi) said 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, according to its latest annual report.

The clarification comes as Dalal Street traders have been raising concerns over the new closing mechanism, citing the unpredictability of recent index and stock price movements and the resulting losses.

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Sebi explains the rationale

In its annual report, Sebi said the Indian capital markets have witnessed a transformative shift towards passive investing, with passive funds accounting for approximately 30% of foreign portfolio investor (FPI) equity assets under management (AUM) and 28% of domestic mutual fund equity AUM as of March 31, 2026.

"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.

"To address these challenges and align with international best practices seen in markets like the NYSE, LSE, and HKEX, SEBI has introduced the Closing Auction Session (CAS). 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. This process ensures lower price disruption and greater execution certainty, providing a more stable and reliable closing price even during periods of high trading volume," said Sebi.

The regulator further said, "This strategic transition marks a significant step in achieving cross-market consistency and enhancing the robustness of India's price discovery mechanism."

CAS replaces VWAP for select stocks

Under the new framework, the closing auction process runs for around 20 minutes, from 3:15 pm to about 3:35 pm. During this period, exchanges first collect buy and sell orders before matching them to determine a single official closing price for a stock. Under the earlier system, a stock's closing price was determined based on the volume-weighted average price of trades executed during the last 30 minutes of the trading session, between 3:00 pm and 3:30 pm.

Implemented from Monday, August 3, the new framework applies only to cash market stocks that have derivative contracts. The existing volume-weighted average price (VWAP)-based methodology will continue for all other stocks.

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However, the difficulty in predicting closing prices under the new mechanism has disrupted traders' risk management systems, prompting many to stay on the sidelines. Since many traders use leverage, unexpected price movements near the close can magnify losses and make risk management more challenging.

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