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Several brokerages have started advising retail investors to close their trades before 3 PM to avoid unexpected price movements at the end of the trading session.
Brokerages have advised this until the market gets used to the new system. Under the revised rules, regular trading now ends at 3:15 PM, after which the exchange spends the next 15 minutes deciding the official closing price based on all the buy and sell orders placed at the end of the trading day.
But first, why is this being advised: the stock exchanges recently introduced a new Closing Auction Session (CAS). Previously, the market's final closing price was simply the price at which the last trade happened. Now, the exchange first matches all the buy and sell orders placed in the last few minutes before deciding the official closing price.
Why was it introduced: the closing price is used to settle futures and options trades, calculate market indices and value many investment portfolios. SEBI believes the new system will make this price more accurate by considering a larger number of buy and sell orders, making it harder for anyone to influence the closing price with a last-minute trade.
Many market participants argued that the earlier closing system was working well, and changing it could create unnecessary confusion, especially on days when large institutional trades take place, such as index rebalancing or derivatives expiry.
But SEBI went ahead with the change after reviewing market data. According to people familiar with the discussions, the regulator found that nearly 90% of institutional trading on index rebalancing days already takes place during the last 30 minutes of trading. It believes moving those orders into a closing auction should make price discovery more transparent over time as participation increases.
What happened because of this: on the first day of the new system, which was Monday, several stocks closed at prices that were quite different from where they were trading just minutes earlier, surprising many traders.
Experts say this happened because there weren't enough buyers and sellers participating in the new closing auction yet, making prices more volatile. As more investors start using the system, these price differences are expected to reduce.
As per, National Stock Exchange (NSE), 515 trading members placed orders on behalf of over 56,700 unique investors on the very first day, compared with 403 trading members and about 42,800 investors in the regular pre-open session.
The exchange said these numbers were a strong start and expects participation to grow further as investors become more familiar with the new system.
Who said what: according to people familiar with the discussions, the biggest supporters of the new Closing Auction Session were global passive investors. Their argument was that most global markets already follow a similar system. It would also allow index funds and ETFs to buy and sell at the same price used to calculate benchmark indices, making it easier to track them accurately.
On the other hand, many domestic institutions, brokers and traders felt India wasn't ready yet. Their concern wasn't the new system itself, but whether there would be enough buyers and sellers participating in the closing auction. If participation remained low, even relatively small orders could cause sharp swings in the final closing price.
