SEBI Moves to Overhaul Closing Auction Session: Weighs Blended VWAP & 3:45 PM Timings

Mumbai: Barely six weeks after operationalizing the Closing Auction Session (CAS) on August 3, 2026, for cash equities in the Futures & Options (F&O) segment, the Securities and Exchange Board of India (SEBI) has stepped in to overhaul the trading framework. In a detailed consultation paper released for public comments, the capital markets regulator proposed sweeping structural modifications to tackle extreme volatility, erratic intraday price swings, and speculative hyperactivity observed on weekly and monthly contract expiry sessions. The regulatory intervention targets the structural link between the CAS single closing equilibrium price and the final cash-settlement calculations of expiring equity and index derivative contracts. Public comments on the regulatory paper remain open through October 3, 2026. For official circulars, consultation papers, and regulatory filings, visit the Securities and Exchange Board of India Official Portal.

The Core Trigger: Expiry Distortions and Option Premium Concentration

Prior to August 3, closing prices were determined using the Volume Weighted Average Price (VWAP) of trades executed during the final 30 minutes (3:00 PM to 3:30 PM) of the Continuous Trading Session (CTS). While CAS was intended to improve multilateral price discovery, its direct integration with derivative settlements triggered unexpected side effects:

• Concentration of Speculative Premiums: SEBI's empirical market study revealed that trading during the 10-minute CAS window accounted for an alarming 4.13% of the total day's option premium turnover on the National Stock Exchange (NSE) and 6.79% on the BSE.
• Transition Period Volumes: Even during the brief 5-minute transition window between continuous trading and auction entry, average expiry-day premium turnover touched ₹791.50 crore on the NSE and ₹668.38 crore on the BSE.
• Dislocation via Indicative Index Values (IIV): High-frequency and algorithmic participants highlighted that fluctuating IIV levels—derived computationally from unexecuted Indicative Equilibrium Prices (IEPs) of underlying shares—spurred massive artificial price distortions in near-the-money and deep-out-of-the-money options.

Two Derivative Settlement Formats on the Table

To insulate expiry-day settlement calculations from localized manipulation or illiquid auction ticks, SEBI has placed two alternative computation models before stakeholders:

• Option 1 (The Blended VWAP Model): Computes the final settlement price by blending trades executed during the final 30 minutes of continuous trading with trades matched during the 10-minute CAS window. The contribution of each period will be dynamically weighted based on its actual traded turnover rather than a static formula, capturing broader liquidity.
• Option 2 (Status Quo / Return to 30-Minute CTS VWAP): Retains the traditional VWAP calculation derived strictly from the last 30 minutes of continuous trading as an interim measure for at least one full year. This provides continuity and allows algorithmic models and institutions to adapt to CAS depth across diverse market cycles before re-linking it to derivative expirations.

Market Timings Architecture: 3:45 PM vs. 3:15 PM Cut-Offs

To eliminate operational frictions and synchronize underlying equity price discovery with derivatives risk management, SEBI invited public feedback on two time-scheduling structures:

• Schedule A (Extended Session to 3:45 PM): Continuous trading runs until 3:30 PM across all scrips; a compressed 1-minute transition leads into the Closing Auction from 3:31 PM to 3:40 PM, while derivative contracts continue trading until 3:45 PM (giving traders a 5-minute window post-auction).
• Schedule B (Early Cash Cut-Off at 3:15 PM): Continuous trading for CAS scrips halts early at 3:15 PM, the Closing Auction runs from 3:15 PM to 3:25 PM, and F&O derivatives trading concludes at the standard 3:30 PM mark. Non-CAS cash equities continue regular trading until 3:30 PM.
• Compression of Dead Windows: Under both proposals, the non-trading transition phase is reduced from 5 minutes to just 1 minute, and post-auction derivative trading is trimmed from 10 minutes to 5 minutes.

Operational Guardrails: Scrapping IIV, Order Curbs, and Icebergs

The regulatory paper introduces three pivotal microstructure safeguards to reinforce market integrity:

1. Discontinuing Indicative Index Value (IIV): SEBI plans to completely halt the real-time dissemination of IIV during CAS to prevent market confusion, aligning with international bourses that publish security-level equilibrium prices without broadcasting theoretical index composite levels.
2. Restricting Limit Order Cancellations: To eliminate order-book spoofing and phantom depth, limit orders entered beyond ±1% from the reference price (up to the ±3% boundary) cannot be cancelled during the auction. Participants will only be permitted to modify orders to improve price closer to market equilibrium.
3. Automatic Iceberg Order Transition: Any unexecuted balance of iceberg orders remaining at the close of continuous trading will automatically port into CAS as standard limit orders, with the entire pending volume fully disclosed in the order book to enhance auction liquidity.