Mutual fund participation in SEBI’s new Closing Auction Session (CAS) for F&O-eligible stocks has grown to nearly 25% since its August 3 launch. This shift replaces the old volume-weighted average price method to improve end-of-day price discovery. While the regulator reports no market manipulation, the transition has caused initial price volatility and forced traders to adjust their automated systems.
The Securities and Exchange Board of India's (SEBI) new Closing Auction Session (CAS), introduced on August 3, is seeing a steady rise in usage by institutional investors. Mutual funds are now driving nearly 25% of the total trading volumes in this session, a significant increase from the 5% to 7% observed during the initial days of the rollout. This system marks a major structural change in how stocks eligible for Futures & Options (F&O) trading calculate their closing prices.
Moving Away From VWAP
For years, the Indian stock market determined closing prices based on the Volume Weighted Average Price (VWAP) of the last 30 minutes of trade. This method was often criticized for being susceptible to last-minute price swings. SEBI replaced this with a formal auction window, aiming to make price discovery more transparent and fair. While institutional investors like mutual funds have adapted quickly, the regulator noted that broader retail participation remains lower as investors and traders get used to the new mechanism.
Transition Challenges and Price Divergence
The implementation of the new system has faced some friction. In the early days, many traders and automated trading systems—which were designed for the older VWAP method—struggled to align with the new auction format. This led to instances where the closing prices of indices like Nifty and Sensex showed unusual divergence from the prices of individual stocks. These fluctuations caused concern among market participants, with some groups even calling for a pause or boycott of the new system.
SEBI Chairman Tuhin Kanta Pandey addressed these concerns, stating that the regulator has been monitoring the activity closely and has found no evidence of market manipulation. He attributed the initial instability to the technical recalibration of trading algorithms rather than any systemic abuse. The regulator has emphasized that the auction process includes mandatory display of indicative prices, ensuring that the system is not a black box.
What Investors Should Monitor
As the market continues to adjust to this change, transparency is becoming the focus. Many major brokerage platforms have already updated their websites and apps to display indicative prices during the auction window, helping traders make better-informed decisions. For investors and traders, the key focus remains on understanding how these closing prices are formed. Since the auction allows for a more controlled price discovery, participants may see different closing patterns compared to the old system. The market is expected to stabilize as trading algorithms are fully updated and liquidity in the auction session improves.