Passive Funds Rejoice! SEBI Proposes Post-Close Auction to Improve Tracking
The Securities and Exchange Board of India (SEBI) proposed to implement a 15-minute post-close auction session, called the Close Auction Session (CAS), between 3:30 p.m. and 3:45 p.m. to determine the closing prices of stocks in the equity cash market. This session would operate similarly to the existing pre-open call auction session.
Reasons for Introducing CAS
The proposal aims to address several concerns, including:
- Reducing price volatility at market close: The current Volume Weighted Average Price (VWAP) method, while fair, does not allow for transactions at the exact closing price and can lead to volatility, particularly on days of index rebalancing and derivative expiry.
- Minimizing tracking errors for passive funds: The VWAP system can result in discrepancies for passive funds that track indices, impacting their performance and ultimately affecting investors.
- Global alignment: Many major markets worldwide, such as the US and Europe, utilize closing auction mechanisms. The proposed CAS would align India's equity markets with global practices.
Phased Implementation and Eligible Stocks
SEBI suggests a phased implementation of CAS, beginning with stocks that have derivative products to ensure sufficient liquidity. The CAS would only apply to these stocks initially and may be extended to other stocks over time.
Proposed Structure of CAS
Two potential structures for the CAS have been proposed:
Option 1: Four-Session Structure
- Reference price determination period
- Order input period
- No-cancellation period with a random close of order entry
- Trade confirmation and order matching
Option 2: Three-Session Structure
- Reference price determination period
- Order input period, including random closing of order entry in the last two minutes
- Trade confirmation and order matching
The three-session structure would omit the no-cancellation period and align more closely with the architecture of the pre-open session's call auction.
Public Consultation
SEBI has invited public comments on the CAS proposal to refine the design and implementation process. The feedback will help ensure that the CAS effectively serves market participants. The last date for submitting comments is December 26, 2024.