Balancing Transparency and Liquidity: Rethinking India’s Closing Price Mechanism

By Rishi Verma and Sarthak Rai

Introduction

On August 22, 2025, the Securities and Exchange Board of India (“SEBI“) released a consultation paper proposing the introduction of a Closing Auction Session (“CAS”) in the equity cash segment to replace the existing Volume Weighted Average Price (“VWAP”) system of determining closing prices. The proposal reflects SEBI’s recognition of the central role played by closing prices in portfolio valuation and index tracking, as well as their vulnerability under the current VWAP regime to volatility and manipulation. By shifting to a transparent auction-based framework, SEBI aims to align India with global practices and strengthen investor confidence. The article shall reflect on SEBI’s proposal to introduce the Closing Auction Session, and identify potential gaps in the proposed framework. It would also suggest refinements by taking global practices into consideration, and concluding with how CAS can enhance transparency, efficiency, and investor confidence.

What is CAS?

CAS refers to a short-period session that would be held at the end of the day, during which the market participants interested in trading at the closing price may input buy and sell orders. This process helps in determining the final price of a security. The consultation paper proposes its implementation as a separate session of 20 minutes from 3:15 PM to 3:35 PM, which would be divided into 4 sessions: Reference Price Calculation, Order entry period for both limit and market orders, Order entry period for limit orders, and Order matching.

How is CAS Better than the VWAP Approach?

In the current scenario, SEBI uses the Volume Weighted Average Price (“VWAP”) approach to calculate the last trading price of a security. Under the VWAP approach, the last trading price is calculated by considering the average price at which a security has traded throughout the day, adjusted for volume. This means that price changes accompanied by higher volume carry more weight than price changes that occur amid low volume. In India, through VWAP, the closing price is calculated on the basis of the trades executed in the last 30 minutes of the session. It is heavily reliant on the volume of trades done at a different price point, which has the potential to distort the closing price if large trades are executed near the end of the window. For example, if any big institutional trade happens near the end of the VWAP calculation window of 30 minutes from 3:00 PM to 3:30 PM, then due to the large volume, there would be a disproportionate effect on the final closing price. This volatility is especially more pronounced during index rebalancing days or large adjustments, where the execution timing within the VWAP window can meaningfully impact the price path.

The CAS approach proposed by the consultation paper aims to address these problems through various measures, such as concentration of liquidity in a single transparent auction, which allows all buy and sell interests to interact simultaneously and have predictability regarding the probable closing price. The consultation paper has also proposed that the reference price would be calculated by using the VWAP of all the trades executed in a 15-minute timeframe from 3:00 PM to 3:15 PM. This is done with the intention of avoiding market distortions, as a lower time frame of 15 minutes would help in mitigating the chances of price manipulation, which would further help in alignment of the reference price with the last trading price. Moreover, the implementation of +/- 3% band from the reference price of the stock would help in keeping the closing price within a range and help in avoiding large distortions in the closing prices.

In addition, to deal with the problem caused by the block deal window, where parties pre-negotiate prices and execute trades in a separate session, the CAS system seeks to aggregate all buy and sell interests from diverse market participants, which include institutional investors, domestic Mutual Funds, FPIs, and retail investors, into a single, liquid price discovery process. This arrangement would help institutional investors in achieving execution certainty at the closing price, effectively helping in dealing with the problems caused by the block deal window, where trades may occur away from the prevailing market price, which has the potential of attracting concerns over price justification and market signalling.

Assessing Gaps in the Framework Proposed by SEBI: A Global Outlook

The proposal in the consultation paper is a significant step towards modernizing India’s determination of the closing prices more fairly and equitably, but there are certain aspects that should be taken into consideration to ensure its fairness and global competitiveness.

The consultation paper has proposed a +/- 3% price band from the reference price of the stock, which would help in keeping the closing price within a limited range. The rationale is that a broader price band could result in trades being executed at levels significantly deviating from the reference price, thereby undermining the price discovery process. However, the price band introduced by SEBI is one of the lowest among all the major stock exchanges, which has the potential of being too restrictive as the Hong Kong Stock Exchange (“HKEX”) had also previously proposed a 2% price limit in 2008, which was not executed afterwards, as the trading data had showed it to be too restrictive and made it difficult for stocks orders to be completed on both normal as well as index rebalancing days. It could have led to traders placing orders more aggressively or trading ahead of the market close, which could have reduced the utility of the CAS system. Additionally, HKEX observed that certain stocks can fluctuate by more than 5% within a few minutes, indicating that even a 5% limit may be too narrow to accommodate such movements. After acknowledging the problem, HKEX revised the price band to 5% during the order input period. Thus, SEBI can recalibrate its choice of having +/- 3% price band by taking into consideration the market conditions and relevant factors, as implementation of this price band can prove to be quite restrictive in terms of absorbing liquidity.

Further, the consultation paper is silent as to whether short selling will be permitted during the Close Auction Session. Short selling is a trading strategy in which an investor borrows a security, sells it on the market, and later repurchases it at a lower price. SEBI permits short selling across all investor categories, except for naked short selling, and only in securities eligible under the ‘Short Selling and Securities Lending and Borrowing’ (“SLB“) framework. SEBI could consider permitting short selling of SLB-eligible securities during the Close Auction Session, as this may encourage participation during the session, improve liquidity, and facilitate price correction in overvalued stocks. SEBI can consider adopting the HKEX framework, under which short selling is permitted for limit orders at prices not lower than the CAS reference price, restricted to designated CAS securities eligible for short selling.

Paving the Way Forward for an Effective CAS System

The CAS framework marks a progressive step in strengthening market structure, but there are still certain aspects that SEBI can consider to further enhance its effectiveness. First, SEBI can consider having volatility bands on the basis of the liquidity of the stocks, similar to the approaches followed by stock exchanges of other countries, such as NASDAQ Nordic. For example, it can retain the tight bands, such as +/- 3% price band for highly liquid stocks that are part of the large-cap indexes and wider bands for certain illiquid stocks. This approach can help in arriving at a fairer closing price by dealing with stocks based on their liquidity, as the price volatility is usually low in the case of stocks of companies that are part of major indexes due to a high number of interested investors and frequent trading, compared to stocks of smaller companies with fewer shareholders and less frequent trading activity.

Similarly, by taking the policies of NASDAQ Nordic into consideration, SEBI can also consider allowing an extension in exceptional circumstances, which employs an ‘extension’ mechanism to manage large swings in price during the auction call period. Such an extension usually triggers in cases when the uncrossed price deviates from the reference period, defined as the price of the last trade in the continuous trading session, and exceeds the volatility bands. Under this arrangement, the order entry phase is prolonged if the imminent uncross price violates preset price limits, which are known as volatility bands. Its effectiveness has been evidenced by NASDAQ Nordic, where it has been observed that such volatility extensions can help in improving the closing price efficiency, particularly in small-cap and mid-cap stocks, as the volatility extension helps in deterring manipulative behaviour that traders indulge in by often either submitting or cancelling large orders during the last few seconds of the auction. Thus, after taking into account the specific dynamics of the Indian market, SEBI can consider adopting this mechanism, as it has the potential of enhancing investor confidence in the CAS mechanism.

Conclusion

The proposed CAS framework is a progressive move towards enhancing transparency, stability, and global alignment in India’s equity markets. The shift from VWAP to an auction-based system addresses concerns of volatility and manipulation, but SEBI can consider fine-tuning and recalibrating certain elements, such as the reference price methodology and the scope for short selling, to ensure the system’s effectiveness. Further, drawing from global practices, including HKEX and NASDAQ Nordic, and by taking the domestic market conditions into consideration, SEBI can design a more flexible and robust CAS mechanism that balances efficiency with investor protection. Hence, by implementing the CAS framework in a strategic and thoughtful manner, it has the potential to improve price discovery and foster investor confidence in India’s equity markets.

Disclaimer

The views expressed in this article are solely those of the author(s). This article is intended for educational/information purposes only. The source of this article is publicly available information, and under no circumstances should the contents of the article be construed to be professional advice by the authors.