Sebi Greenlights Major Overhaul for Stock Market Closing Prices
India's securities market regulator has taken a decisive step toward modernizing how stock prices are determined at the end of each trading day. The Securities and Exchange Board of India (Sebi) has officially approved a significant shift away from the traditional volume-weighted average price method. Instead, the markets will adopt an auction-based system designed to bring greater transparency and fairness to price discovery during the crucial closing period.
Introducing the Closing Auction Session
This new framework, named the Closing Auction Session (CAS), represents a fundamental change in market operations. Sebi announced the details through a circular issued on Friday, outlining a phased implementation plan. The rollout will begin in August 2026, initially applying to cash market stocks that have corresponding derivative contracts. For other stocks, the existing VWAP method will continue to operate as before.
Sebi emphasized that this move aligns Indian financial markets with international standards. The regulator believes the auction system will support better settlement processes for derivatives and indices. It should also improve execution quality for large orders while reducing tracking errors for passive investment funds.
How the New System Will Work
Currently, closing prices are calculated using the volume-weighted average price of trades executed during the final thirty minutes of continuous trading. Under the new CAS framework, closing prices will be discovered through a dedicated auction session that pools all buy and sell interest into a single liquidity window.
The Closing Auction Session will operate for twenty minutes each day, running from 3:15 pm to 3:35 pm immediately after regular trading concludes. The session will follow a structured sequence: a transition phase from continuous trading, an order entry period for market and limit orders, followed by a limit-only phase with random closure during the final two minutes before final order matching occurs.
Sebi has established clear rules for the reference price that will anchor this auction. The reference price will be determined as the VWAP of trades occurring between 3:00 pm and 3:15 pm. If no trades happen during that fifteen-minute window, the last traded price will serve as the reference. Should that also be unavailable, the previous day's closing price will apply instead. Throughout the CAS, a price band of ±3% around the reference price will be strictly enforced.
Order Rules and Price Discovery Mechanics
The auction session will permit only market and limit orders. Certain order types like iceberg orders and stop-loss orders will not be allowed during this period. Unexecuted limit orders from the continuous trading session will automatically carry forward into the CAS, with exceptions for stop-loss orders, iceberg orders, and any orders falling outside the applicable price band.
All eligible orders will contribute to determining what Sebi calls the equilibrium price. This equilibrium price is defined as the price point where maximum executable volume can be achieved. When multiple prices qualify under this definition, the system will select the price with the least unmatched quantity. If ambiguity persists even after this step, the price closest to the reference price will be chosen. In cases where no equilibrium price emerges through this process, the reference price itself will become the official closing price for that trading day.
Market orders will receive execution priority over limit orders during the auction. Risk management protocols and margin requirements applicable to the regular cash market will continue during the CAS, though certain relaxations will apply specifically to unmodified carried-forward limit orders.
Impact on Derivatives and Implementation Timeline
Since closing prices directly affect settlement processes, Sebi has amended the settlement framework for both stock and index derivatives. These derivatives will now settle based on prices discovered through the closing auction rather than the previous VWAP method. The equity derivatives segment will continue trading until 3:40 pm, while the post-close session in the cash market will operate from 3:50 pm to 4:00 pm, during which all trades will execute at the officially determined closing price.
Sebi has issued directives to stock exchanges and clearing corporations, instructing them to jointly finalize standard operating procedures for settlement prices and price-band alignment within thirty days. The regulator has also synchronized the pre-open auction session with the new CAS framework. The pre-open session will maintain its fifteen-minute duration, allow market and limit orders, follow a similar equilibrium price discovery mechanism with random closure, and provide enhanced transparency through dissemination of indicative prices and order imbalances.
The Closing Auction Session will officially commence on August 3, 2026. The revised pre-open auction framework will follow shortly after, taking effect from September 7, 2026. This staggered implementation gives market participants adequate time to adapt their systems and processes to the new auction-based approach to price discovery.
