Introduced this week to improve closing-price discovery, the Closing Auction Session (CAS) has left the markets in a tizzy. Major changes are greeted with circumspection, but traders can be forgiven for wanting to sit this one out. Stock movements during the 20-minute window, starting at 3.15 pm, are becoming less jumpy. While the Nifty 50 rose 0.82% during CAS on Monday, the movement had narrowed to just 0.03% by Thursday. Despite Thursday being the Sensex derivatives expiry day, price movements were orderly. Even so, the Securities and Exchange Board of India (Sebi) has its work cut out because traders remain reluctant to participate. Closing auctions work best in deep and liquid markets, where market-makers and arbitrageurs can narrow pricing discrepancies across the cash and derivatives segments. As Zerodha CEO Nithin Kamath has observed, the sharp movements reflect the limited liquidity and arbitrage capacity of Indian markets rather than a flaw in CAS itself.
One way to deepen participation would be to strengthen the securities lending and borrowing mechanism (SLBM), making it easier for traders to borrow shares and take short positions. In its annual report for 2025-26, Sebi has proposed revamping the framework to improve price discovery and strengthen the link between the cash and derivatives markets. The regulator acknowledges that the SLBM, introduced in 2008 and modified several times since, remains underdeveloped compared with global markets. A more robust short-selling mechanism would help counter one-way price movements and make price discovery more efficient. The surge in the Nifty during the first couple of CAS sessions — more than 200 points on one occasion — should ordinarily have attracted short-sellers. That it did not suggests the market lacks either the tools, the confidence, or both to exploit such opportunities. Several proprietary trading firms and high-frequency traders appear willing to stay away rather than risk losses in an unfamiliar and thinly traded session.
There are operational shortcomings as well. Although exchanges disseminate indicative equilibrium prices and information on order imbalances, several brokers have not displayed these data adequately to clients during CAS. Without easy access to them, traders cannot make informed calls. Sebi has reportedly asked brokers to improve the display of indicative prices and encourage wider participation. This should be treated as an urgent technology and communication issue. CAS can be useful not only for passive funds seeking to minimise tracking errors but also for active fund managers whose returns are benchmarked to indices. By basing closing prices on auction orders rather than the volume-weighted average price during the final part of continuous trading, it can also reduce the influence of aggressive last-minute trades. Closing auctions are standard practice in developed markets, and there is no reason India should not adopt one.
But global practice alone cannot guarantee domestic success. Sebi and the exchanges must ensure that participants have adequate information, surveillance remains rigorous, and the supporting infrastructure — especially stock lending and arbitrage—is strengthened. Better communication can reassure traders, but confidence will ultimately come from orderly price discovery and sufficient liquidity. Four sessions are too few to conclude that the mechanism is fundamentally flawed; Thursday’s calmer trading suggests some of the initial turbulence may have reflected unfamiliarity. CAS should, therefore, not be rolled back because of a difficult first week. Nor should its teething troubles be dismissed. The mechanism will work as intended only when enough participants are willing and equipped to enter the auction.