Tuhin Kanta Pandey, the chairman of the Securities and Exchange Board of India (Sebi), has called for persistence regarding the recently introduced closing auction session (CAS) on stock exchanges. While acknowledging initial complaints and the need for vigilance, Pandey emphasized that the market regulator is in dialogue with various participants and is open to making necessary adjustments.
Understanding the New Closing Auction System
The closing auction session was implemented to facilitate more efficient discovery of closing stock prices. Under this system, continuous trading concludes at 3:15 PM, after which the official closing price is determined by pooling buy and sell orders and matching trades at a common price. This new method replaced the previous Volume Weighted Average Price (VWAP) system.
Initial Challenges and Sebi's Stance
Since its rollout, the CAS has faced numerous complaints, with market participants observing noticeable discrepancies between pre-auction price levels and final settlements during its initial days. Despite these issues, Pandey stated that Sebi has not yet observed any manipulation within the closing auction session but is monitoring it closely.
Pandey explained that new systems often take time for all participants to fully comprehend. Speaking to reporters at a commodity summit in Mumbai, he confirmed that Sebi is actively engaging with various stakeholders to gather their input. "If there is a necessity to tweak a few things, we will look into it," he affirmed.
A Major Microstructure Reform
The Sebi chief highlighted the closing auction session as a significant microstructure reform, noting that Indian markets had lagged behind global counterparts such as Japan, Hong Kong, and the USA, which had already adopted similar systems. He underscored its importance for passive investing and the calculation of mutual fund Net Asset Values (NAV), which require a single, clear closing price.
Pandey pointed out that the earlier VWAP system was susceptible to manipulation, where a single trade in the final minute could disproportionately influence the closing price. The CAS aims to mitigate this risk, offering a more transparent market where pricing is consistently visible.
Encouraging Participation and Adaptation
Pandey acknowledged that some issues might stem from industry-developed algorithms still being configured for the older system. He stressed the imperative to increase participation in the CAS and ensure that more market participants understand its mechanics. "We have to be watchful, but we have to be persistent, see that everyone understands the market. It's not a big thing to understand and I hope it settles," he concluded.