The newly introduced Closing Auction Session, active since August 3, is causing unintended price swings in Nifty put options. The Securities and Exchange Board of India (SEBI) is now reviewing the settlement methodology to fix a timing gap between cash and derivative markets. Investors should be aware of these artificial price moves during expiry sessions while awaiting a regulatory update.
The Indian stock market's recently launched Closing Auction Session (CAS) has come under scrutiny following reports of extreme volatility in derivatives trading. Since its introduction on August 3, 2026, the session—designed to determine official closing prices for stocks eligible for futures and options—has led to sharp, sudden price spikes in Nifty and Sensex put options during expiry days.
The core issue stems from a timing mismatch. The new auction system operates between 3:15 PM and 3:35 PM to set the day's final price. However, trading in derivative contracts continues until 3:40 PM. Market participants have identified this 10-minute gap as a weak point, where the lack of synchronized closing times creates opportunities for artificial price swings. Traders have reported instances where put option premiums jumped significantly within minutes, creating risks for those holding open positions during the auction window.
The Securities and Exchange Board of India (SEBI) has acknowledged these concerns. The regulator is currently reviewing the feedback regarding the settlement-price methodology and the structural risks it creates for traders. To address the potential for price manipulation and systemic instability, the regulator plans to issue a consultation paper by mid-September 2026. This paper will outline potential modifications to the current system to ensure better alignment between the cash and derivatives segments.
For investors and traders, these developments highlight the importance of caution during the final minutes of the trading day. The artificial price distortions observed during the auction period can lead to unexpected losses, particularly for those using automated trading strategies or holding heavy exposure to options near expiry. While the market waits for a formal policy shift, traders are advised to remain mindful of the heightened volatility that can occur during the 3:15 PM to 3:40 PM window. The next major update will be the release of the SEBI consultation paper, which will be critical in determining how the regulator intends to reshape the closing session to prevent further distortions.