SEBI may rethink its closing auction rules

SEBI will partly reverse its new closing price system after feedback from market participants, according to sources cited by Reuters. 

The biggest expected change: derivatives may go back to their old settlement method for at least another year.

But before we get into more details, let’s first understand what CAS is. 

Closing Auction Session is a short auction held at the end of the trading day to decide a stock’s final closing price. Instead of simply using trades from the last 30 minutes, buy and sell orders are collected during this auction to arrive at a closing price. Similar systems are used in markets such as the US and Hong Kong.

The problem: SEBI introduced CAS last month for stocks that have futures and options linked to them. But the new system led to sharp movements in derivatives prices, particularly on expiry days.

SEBI then asked the market what needed fixing and received around 20,000 comments and suggestions. 

A major concern was using CAS prices to settle futures and options. Traders argued that this could make the final settlement price harder to predict and create a mismatch between their derivatives and the stocks they use to hedge them.

What might change: the biggest change could be a return to the old system for derivatives. For at least a year, their settlement price could once again be calculated using the average traded price during the final 30 minutes of regular trading, instead of including the closing auction.

CAS itself isn't going away. It could continue to determine the closing price of underlying stocks, particularly in the less-liquid cash market.

SEBI is also expected to broadly retain the existing timings. Regular trading could continue until 3:30 pm, followed by CAS, while derivatives trading could remain open until 3:45 pm.

Another proposal was to stop showing where the index was moving during CAS. But traders said this would make the process less clear, so SEBI is now likely to keep showing it, while reminding investors that the final index value is decided only after CAS ends.