Summary:
SEBI has urged brokers to encourage greater retail participation in the newly introduced Closing Auction Session (CAS) to improve liquidity and reduce sharp price swings at market close. The move follows unusual divergences in the Nifty 50 and Sensex after the new auction-based closing mechanism replaced the earlier VWAP system. Lower participation from arbitrage funds has contributed to supply-demand imbalances during the auction period. SEBI is reviewing market feedback while supporting wider participation to ensure smoother price discovery.
The Securities and Exchange Board of India (Sebi) has asked brokers to encourage greater participation from retail investors in the newly introduced Closing Auction Session (CAS). The move comes after concerns emerged over sharp price movements and lower liquidity during the final minutes of market trading.
Sebi conveyed the message during a meeting with brokers on Tuesday, ahead of the second trading day under the new closing auction framework. Brokers agreed to the regulator’s request and said they would inform and encourage investors to participate in the new system.
The discussions took place after unusual movements were observed in benchmark indices during the closing auction period. The Nifty 50 and Sensex showed significant differences in their closing movements over the first two days of implementation.
Why the new closing auction system caused volatility
Under the earlier system, stock closing prices were calculated using the volume-weighted average price (VWAP) of trades executed during the last 30 minutes of continuous trading.
However, under the new Closing Auction Session, prices are determined through an auction mechanism. During the auction window, buy and sell orders are collected, and the system identifies a single price at which the maximum number of shares can be traded.
The shift has raised concerns about liquidity, especially when institutional participants are unable to participate effectively. Brokers highlighted that the earlier closure of continuous trading at 3:15 pm instead of 3:30 pm prevents arbitrage funds from asset management companies from operating during this period, as they need to execute buy and sell transactions simultaneously.
This reduced participation from arbitrage funds has created an imbalance between supply and demand from other large institutional investors, contributing to sharp price movements during the auction.
Take a Look At the Aftermath of the new Closing Auction Session
Market impact: Nifty sees sharp closing movement compared with Sensex
The impact of the new system was visible in the market’s closing movements.
On the first day of CAS implementation, the Sensex gained 0.7%, while the Nifty 50 surged 1.6%. A 200-point spike in the final two minutes of the auction session pushed the Nifty higher by 1.6%, compared with only a 0.7% rise in the Sensex.
On Tuesday, the weekly expiry day for Nifty options, the Nifty 50 closed 0.64% lower at 24,614.90, while the Sensex ended 0.27% down at 78,428.95.
The Nifty gained 151.45 points from 24,463.45, the level at the close of continuous trading at 3:15 pm, to the final auction closing level at 3:35 pm. In comparison, the Sensex moved up by only 104.39 points during the same period.
Low liquidity in BSE auction raises concerns ahead of Sensex expiry
Market participants also highlighted concerns over potential volatility during Thursday’s Sensex options expiry due to limited liquidity in the BSE closing auction session.
Exchange data showed that BSE’s auction value stood at only ₹19 crore, compared with NSE’s auction value of ₹1,542 crore on Tuesday.
Participants noted that while the closing price situation improved compared with the previous day, the upcoming Sensex weekly expiry could remain a key area of focus due to lower liquidity.
Sebi supports the new framework but seeks wider participation
Sebi has indicated that it supports the Closing Auction Session and has asked brokers to educate their members and encourage participation to improve liquidity and reduce abnormal price movements.
The regulator is also reviewing concerns raised by market participants, including the absence of arbitrage funds during the auction period. The effectiveness of the new system will depend on wider participation from retail and institutional investors to ensure smoother price discovery.
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