Closing Auction Session: Did SEBI Put The Cart Before The Horse?

The Closing Auction Session, or CAS, met the market on August 3. Within days, traders began complaining about sharp and unfamiliar movements around the close. Questions were raised about price discovery and the interaction between the cash and derivatives markets. SEBI has made it clear there will be no rollback and has asked brokers to educate investors about the new system. A campaign by traders on social media, calling for a one-day trading boycott, demonstrates their woes.

It would be premature to describe this as an industry-wide movement. But the fact that such a campaign has emerged within days of a major market structure change deserves attention. This is not an argument against CAS; it is an argument for asking whether a potentially good reform was adequately prepared before implementation.

SEBI’s Objectives

There is little to dispute about the objective. SEBI has argued that a closing auction can aggregate market interest, improve price discovery, provide a more transparent closing price, facilitate large institutional orders, and help passive funds reduce tracking error. It has also pointed out that closing auctions are widely used in major international markets.

These are legitimate objectives and arguments. The difficulty lies in moving from objective to implementation.

SEBI did undertake a notional consultation process, with consultation papers in 2024 and 2025, followed by protocol deliberations in its Secondary Market Advisory Committee.

But consultation should mean more than inviting comments. For a change as consequential as altering the mechanism by which closing prices are discovered, the market should understand the competing arguments, the alternatives considered, the evidence relied upon, and the risks identified.

International Comparison Needs Qualification

The international comparison also needs qualification. Yes, closing auctions are standard in major markets. But market structure does not operate in isolation. India has a uniquely large retail participation base and an exceptionally active equity derivatives market. The institutional, technological, and behavioural conditions supporting closing auctions elsewhere cannot simply be assumed to exist in identical form here.

A mechanism that works efficiently in one market can produce different outcomes in another. That makes preparation particularly important.

Consider investor education. For an experienced market participant, an auction mechanism may appear straightforward. For a retail investor accustomed to the last traded price becoming the closing price, it is not necessarily intuitive that continuous trading can end at one price while the final closing price is subsequently determined through an auction.

SEBI’s subsequent instruction to brokers to educate investors is welcome. But one question naturally follows: should that education not have preceded implementation?

Need For Better Preparation

A reform of this scale could have been accompanied by extensive mock trading, exchange simulations, broker demonstrations, and a sustained public education campaign. The investor should not learn the rules by losing money.

There is another question about sequencing. A closing auction needs genuine two-sided liquidity. That raises the issue of India’s securities lending and borrowing mechanism.

A deeper SLBM can facilitate genuine short selling, broaden the pool of potential sellers and contribute to balanced price discovery. India has had an SLBM framework for years, but its utilisation remains relatively modest.

Should India, therefore, have first concentrated more aggressively on making securities lending deeper and more liquid before redesigning the cash market closing mechanism?

There may be good reasons why the answer is no. But the question deserved serious examination.

Financial market architecture is a complete ecosystem. Changing one component can have consequences for another. If supporting infrastructure is not sufficiently mature, a mechanism borrowed from a more developed market may not behave exactly as expected.

Need For Empirical Scrutiny

The early experience, therefore, deserves empirical scrutiny.

The unusual movements around the close do not, by themselves, establish that CAS is defective. It is far too early to reach that conclusion. Markets need time to adapt. But neither should legitimate concerns be dismissed simply as resistance to change. SEBI should measure what is actually happening. How many participants are entering the auction? How large are the order imbalances? How far does the final auction price move from the pre-auction reference price? How does volatility compare with the earlier VWAP mechanism? What happens on expiry days? How does the cash price interact with derivatives? These are empirical questions and should be answered by evidence.

For all we know, CAS may ultimately succeed. It may produce a more representative closing price, improve execution for institutions and passive funds, and become a valuable part of India’s market architecture. But that possibility does not mean the planning and rollout are beyond criticism.

Importance Of Evidence-Based Regulation

The strongest regulators are not those who never revisit their decisions; they are those who listen to the market, examine evidence objectively, and modify a reform when required. SEBI does not lose authority by listening to traders; it strengthens its credibility by demonstrating that regulation remains evidence-based.

The trading boycott call and the market feedback should, therefore, neither be dismissed as an irritant nor treated as proof that CAS has failed. It is feedback from one section of the market. The regulator should listen. Perhaps CAS will prove to be exactly what its architects intended. Perhaps some adjustments will be necessary. But one lesson is already clear—good regulatory objectives require good regulatory execution.

Consultation must be with competent voices. Testing must be rigorous. Investor education must precede implementation. Supporting infrastructure must keep pace. And when the market speaks, the regulator must be prepared to listen. Sometimes the difference between a good reform and a successful reform is simply the wisdom to ask one question before implementation: Is the cart being put before the horse?

The writer is a retired IRS officer and former chief of surveillance at SEBI. He is an advisor to corporates, market participants and tech entrepreneurs.

Published on: Wednesday, August 12, 2026, 09:59 PM IST