SEBI Proposes Auction Process for Accurate Closing Prices

Recently, SEBI (Securities and Exchange Board of India) has proposed a new process for determining the closing price of stocks in the Indian stock market. The aim of this proposal is to enhance market transparency and make closing prices more accurate.

Let’s explore this proposal in detail.

What’s Happening?

On December 5, 2024, SEBI released a consultation paper proposing the implementation of a ‘Close Auction Session’ (CAS) in the stock market. Under this new procedure, a special 15-minute session will be held between 3:30 PM and 3:45 PM, after regular trading hours. During this time, investors will place buy and sell orders to determine the closing price of a stock.

Currently, in India, the closing price of a stock is determined based on the volume weighted average price (VWAP) of the last 30 minutes of trading. SEBI believes this process does not accurately reflect all market conditions, especially during periods of high volatility.

SEBI’s CAS Proposal

SEBI has suggested implementing the ‘Close Auction Session’ (CAS) in a phased manner. Initially, it will be applied only to stocks with derivative products to ensure sufficient liquidity. Over time, the system may be extended to other stocks as well.

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Why Is This Process Important?

The closing price is a crucial data point for any market. It not only serves as a reference for the next day’s trading but is also used by fund managers, investors, and analysts to evaluate stocks. Under the current system, there have been instances where the closing price does not reflect the true state of the market, leading to misleading signals for investors.

The new Close Auction Session aims to address this issue. By increasing transparency in the determination of closing prices, it will provide investors with more accurate data.

What Does This Mean for Investors?

According to Money Control, the current system of determining the closing price in India is based on the volume weighted average price (VWAP) of the last 30 minutes of trading. International passive fund houses have expressed concerns about this process, stating that it could increase price volatility in certain stocks and lead to the risk of large orders not being filled.

This issue becomes more significant on days when major events occur, such as index rebalancing and derivatives expiry. This increases tracking differences for passive funds, which can pose a considerable challenge for investors.

What’s Next?

With the new ‘Close Auction Session’ proposal, SEBI has introduced another reform to improve India’s equity markets. To gather feedback, SEBI has invited public suggestions on the CAS proposal. The feedback will help enhance the design and implementation of the system, ensuring it proves effective for all market participants. The deadline for submitting suggestions is December 26, 2024.

This article is for informational purposes only. This is not investment advice. Disclaimer: Teji Mandi Disclaimer