(Chapter 5)
Why SEBI introduced Closing Auction Session or CAS in India?
SEBI is the apex body entrusted with oversight of financial market. Its history and evolution has been discussed in Chapter 1 and 2 of this series.
There is a certain predictability to regulatory interventions in Indian markets. SEBI identifies a problem, often a real one. It designs a solution, sometimes a thoughtful one. It implements the solution, usually with fanfare. And then the solution creates a new problem that is frequently worse than the original. The Closing Auction Session, which went live on August 3, 2026, is the latest demonstration of this cycle.
Financial markets do not exist just for day traders to make or lose money. They serve a macroeconomic purpose: establishing the cost of capital. A healthy financial market is a precondition for a robust economy. A robust price discovery is the only barometer of health of a financial market.
Price Discovery
Price discovery is the decentralized process through which thousands or millions of buyers and sellers, each acting on private information, risk appetites, and economic needs, vote with real money in real time.
No single bureaucrat, algorithm, exchange official, or institutional entity possesses all available information about an asset’s true value.
Price discovery is not merely one feature among many in a financial market; it is the fundamental reason financial markets exist.
If capital allocation, hedging, corporate valuation, and wealth creation are the organs of a market economy, price discovery is the oxygen. When price discovery is genuine, capital flows to where it is productive. When price discovery is distorted or manufactured, every economic calculation downstream becomes flawed.
SEBI as regulator can not interfere in trading of financial instruments but it can function as gatekeeper to the market. It also gets to set down the rules of trading. Concerned with volatility of prices in the morning, it introduced a 15 minutes cool off period in 2010, called pre-open session.
Pre-Open Session
Prior to October 2010, the stock market in India opened abruptly into continuous trading at 9:15 AM. Frequently overnight news, such as a crash in US markets, crude oil spikes, or overnight corporate earnings announcements caused volatility in opening session. The first 15 minutes of continuous trading (9:15 AM – 9:30 AM) suffered from extreme wild price swings, order execution jams, and severe slippage. Large market orders placed at 9:15 AM triggered artificial price spikes and circuit breakers before real supply and demand could settle.
Therefore, a pre-open session was designed to pool overnight orders into a call auction to discover a single, rational “equilibrium price” before regular trading began.
Retail investor learned to stay away from the pre-open session all together. Often large players game the 9:00 AM – 9:08 AM window. An entity would place a massive buy order for 1,000,000 shares at 9:01 AM to artificially inflate the “Indicative Equilibrium Price” on retail screens. Just before the 9:08 AM cutoff, they would cancel the order. The retail trader who placed market order gets trapped at distorted opening prices.
The pre-open session did not stabilize on its own; it required regulatory tightening and algorithmic maturation over 1 to 2 years. SEBI had to introduce a random system-generated closure between 9:07 AM and 9:08 AM. Thus, manipulators could no longer predict the exact second the window would shut, Placing fake orders and trying to cancel them at 9:07:59 AM became extremely risky. An order might get locked in and executed a few seconds earlier than anticipated.
SEBI also imposed tight price limits (e.g., ±20% for IPO pre-open, ±5% or ±10% for normal stocks) to prevent absurd price indications.
However, the advice of every financial maker expert is to completely ignore this pre-open session. Wise do not even look at it for any indication but that is an extreme view. Pre-open does indicate the institutional bias. It shows that institutions are bullish or not.
Now SEBI has decided to manage the closing session in a similar way.
The VWAP Method
In Stock Exchanges, the last trading price of a scrip represents true price of an asset. Presently the stock exchanges in India determine the closing price of F&O-eligible stocks on the basis of Volume Weighted Average Price. In this method, the price of entire volume of trades in the final thirty minutes, from 3:00 PM to 3:30 PM, is determined by its average. This method was vulnerable to manipulation.
This system is heavily biased in favour of sellers. A seller with large volume can determine the outcome of the market price discovery.
A sufficiently large player could concentrate aggressive buying or selling in those final minutes to move the VWAP in a desired direction. If that player simultaneously held large derivative positions that profited from the engineered closing price, the manipulation was not just profitable. It was structured to be so.
This manipulation came to light in the case of Jane Street manipulation. Perhaps this prompted the SEBI to look overseas and import an idea called Closing Auction Session, in India.
CAS or Closing Auction Session
SEBI introduced the Closing Auction Session (CAS) on August 3, 2026, specifically to eliminate the 30-minute VWAP that Jane Street had exploited. The theory was that a single call auction would absorb aggressive trades and make it harder to push the price.
Under CAS the closing price would be determined through an auction. Between 3:15 PM and 3:35 PM, buy and sell orders would pool together. A single equilibrium price, the one at which the maximum volume could be matched, would become the official close.
An auction, in theory, is harder to manipulate than a rolling average. To push an equilibrium price, a manipulator would need to absorb the full weight of opposing orders, not just outrun a moving average with aggressive trades. Global exchanges use auction-based closes precisely for this reason.
In practice the system favoured buyers with large order books and willingness to pay higher price. They ended up determining the price.
In the first two days of its existence, the mechanism produced closing prices that no continuous trading session had approached, caused a Nifty 24,600 put option worth over Rs. 100 to expire worthless, sent GIFT Nifty tumbling by over 140 points in overnight trading, and created a new window for the systematic extraction of money from retail participants. All of this was achieved in the final 25 minutes of each trading day, two days in a row.
That is an impressive record of destruction for a reform that had not yet completed its second session.
In Chapter 6 we shall discuss the Jane Street Case and how specific problems created by Closing Auction Session imitate the pattern of Jane Street. We will also address why the retail traders are spooked by it.
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