Indian stock exchanges are actively preparing for a significant shift to a new Closing Auction Mechanism from August 3, designed to enhance transparency and accuracy in determining closing prices for securities with derivative contracts.
Key Points
- Indian stock exchanges are set to introduce a new Closing Auction Session (CAS) from August 3, initially for securities with derivative contracts.
- The CAS aims to bring greater transparency to closing price determination, addressing a need for fund houses.
- The 20-minute CAS will run from 3:15 pm to 3:35 pm, with specific periods for order entry and matching.
- For other securities, the closing price will continue to be based on the volume-weighted average price of trades in the last 30 minutes of the continuous trading session.
- The National Stock Exchange will disseminate both actual and indicative index close values during CAS to manage the phased implementation.
With nearly ten days left before the transition to the new close auction mechanism, exchanges are actively preparing for the change.
They conducted mock trading sessions last weekend and have scheduled more over the coming weeks to allow brokers to test the system. The latest mock trading was conducted on July 18.
Understanding the New Mechanism
The new mechanism, aimed at a more transparent closing price, is scheduled to be made effective from August 3.
The closing auction session (CAS) will be applicable for the cash segment — for securities on which derivative contracts are available.
The closing price of such securities will be determined based on CAS.
For other securities, it may be brought in a phased manner.
The closing price for the remaining securities in the cash segment will continue to be determined based on volume weighted average price of the trades executed during the last 30 minutes of the continuous trading session (CTS) in the cash segment.
"It may bring some confusion for retail investors in the early phase as some stocks will get closed earlier than others, but as the investors get into the habit of it, there might be some clarity for them.
"The market regulator is trying to solve a problem for fund houses for whom closing price becomes more authentic," said an executive from the broking industry.
Implementation and Potential Challenges
A few industry players noted that if any major technical issues are seen during the mock trading, then the implementation timeline may be extended.
CAS will be a separate session of 20 minutes from 3.15 pm to 3.35 pm.
The reference price calculation or transition from CTS to CAS will be from 3.15 pm to 3.20 pm where no order entry will be allowed.
The following five minutes will be the order entry period for both limit orders and market orders.
From 3.25 pm to 3.30 pm, the order entry period will be restricted to limit orders only, and no modifications or cancellations of market orders will be allowed.
In this period, trading may close randomly in the last two minutes.
After that order matching will be done.
The equity derivatives segment will continue to operate up to 3.40 pm on all trading days.
The price band for all stock futures contracts will be set in the 3 per cent range of the reference price computed after 3.15 pm during market hours.
The post-close session in the cash segment will operate between 3.50 pm and 4 pm, during which trades will be executed at the closing price of stocks.
Future Alignments and Index Dissemination
The alignment of pre-open auction session framework is scheduled to be implemented from September 7.
"Since the CAS mechanism shall be implemented in a phased manner, it is possible that certain constituents of any index are trading in CAS whereas the remaining constituents of the same index are trading in CTS simultaneously.
"Thus, the exchange shall disseminate both the actual index value and the indicative index close value during the CAS," the National Stock Exchange had noted in its FAQs.
