SEBI Moves to Improve Stock Price Discovery by Opening Five-Minute Closing Auction Gap

India’s market regulator is looking to make the stock market’s new closing auction system more efficient by allowing brokers to accept orders during the first five minutes of the Closing Auction Session, according to people familiar with the discussions.

The proposed change could allow investors to place after-market orders between 3:15 pm and 3:20 pm, before those orders are sent into the auction. The move is aimed at improving liquidity and making the process used to determine stock closing prices more efficient.

India introduced the Closing Auction Session, or CAS, on 3 August as part of changes to the way closing prices are determined for stocks that have derivative contracts. Under the new system, continuous trading for these stocks ends at 3:15 pm, followed by a 20-minute auction that runs until 3:35 pm.

The first five minutes of the auction, from 3:15 pm to 3:20 pm, are currently used to calculate the reference price and move from the normal trading session to the auction. Investors cannot currently enter orders during this period. Order entry begins at 3:20 pm.

Under the proposed change, brokers would be able to collect orders from clients during the five-minute transition period. Those orders would then enter the market when the order-entry phase begins.

The change follows concerns about liquidity during the new closing mechanism. The first few sessions under CAS saw sharp movements in the Nifty 50 and BSE Sensex, with analysts pointing to limited liquidity and weaknesses in the securities lending and borrowing market as some of the reasons behind the volatility.

The closing price is important because it is used by investors, fund managers and market participants for several purposes. A reliable closing price helps investors understand where a stock finished the trading day and supports the valuation and settlement processes linked to the market.

The CAS system was introduced to make price discovery more transparent and robust. Instead of relying on the previous method of calculating the closing price using the volume-weighted average of trades during the final 30 minutes, the new system uses an auction to determine the closing price for eligible stocks.

During the auction, orders are collected and matched to find a price at which the maximum possible quantity of shares can be traded. This is intended to reduce the impact that a small number of trades can have on the final closing price.

The National Stock Exchange says the CAS currently runs from 3:15 pm to 3:35 pm. After the five-minute transition period, both market and limit orders can be entered between 3:20 pm and 3:25 pm. From 3:25 pm to 3:30 pm, only limit orders are allowed, followed by order matching and trade confirmation from 3:30 pm to 3:35 pm.

The regulator’s latest move shows that the new system is still being adjusted after its initial rollout. Exchanges have already introduced other measures, including displaying indicative prices for benchmark indices during the auction and making changes to the securities lending and borrowing segment.

HDFC Securities chief executive Dhiraj Relli told Reuters that the brokerage plans to start accepting after-market orders between 3:15 pm and 3:20 pm from September. The expectation is that allowing more orders to build up before the auction will improve participation and price discovery.

For investors, the change could make the closing auction more useful by bringing more orders into the process. It also shows how exchanges and regulators are responding to the practical issues that have emerged since the new closing mechanism was introduced.

The wider aim is to create a closing price that better reflects available buying and selling interest, while reducing sudden movements caused by thin trading. As India’s new closing auction system settles into regular use, further changes could follow as regulators and exchanges assess how the mechanism performs.