Why in the news?

• SEBI announced a new Closing Auction Session framework.

Closing Auction Session

• What is it?:
  • It is a short trading session at the end of the market day to determine the final/closing price of a security.
  • Provides a transparent, auction-based price discovery mechanism instead of relying on the Volume Weighted Average Price(VWAP) of last trades.
• Key Features:
  • Initial implementation for highly liquid derivative stock and later extending to all stocks.
  • Four phased implementation – 
    • Reference Price Calculation: Based on VWAP between 3:00–3:15 p.m.
    • Order Entry: Investors place buy/sell orders.
    • Random Close: Random end within the window to prevent manipulation.
    • Final Matching: Orders matched to arrive at closing price.
  • Closing auction operates within ±3% of the reference price.
  • Real-time data dissemination during Closing Auction Session.
• Benefits of the system:
  • Better Price Discovery:  Pools all orders into one transparent auction.
  • Reduced Volatility: Avoids distortions common in VWAP-based closing.
  • Fairness: Large & passive investors (mutual funds, index funds) get efficient execution.
  • Stability on Rebalancing Days: Less scope for last-minute large trades to distort closing prices.
• Related concern:
  • Passive Mutual Funds: Risk of negative cash balances on index rebalancing days- leading to settlement issues.