Closing Auction Volatility Prompts SEBI to Consider New Expiry-Day Settlement Formula

Closing Auction Volatility Prompts SEBI to Consider New Expiry-Day Settlement Formula
Jitendra Kumar
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SEBI is considering a new approach to derivatives settlement after the introduction of the Closing Auction Session led to concerns about volatility and price differences during the final minutes of trading.

The issue has become particularly important on expiry days, when futures and options contracts are settled using prices linked to the underlying market.

The Closing Auction Session was introduced on August 3, 2026, as part of an effort to improve price discovery at the end of the trading day. SEBI’s objective was to create a more transparent closing price by bringing together market orders and limit orders in an auction environment.

The regulator had argued that closing prices have a wider importance than simply determining where a stock ends the trading session. They are used in derivatives settlement, index calculation and other market-related processes. A robust closing-price mechanism is therefore important for the wider financial system.

However, the new arrangement soon became a subject of debate.

One of the major concerns was the difference in timing between the cash-market auction and the derivatives market. Under the existing framework, the cash-market Closing Auction Session operates through the final part of the trading day, while the derivatives segment continues to trade for a period afterward.

This creates a situation in which traders in derivatives may continue to adjust their positions after the cash-market auction price has been determined. On expiry days, this can create additional uncertainty.

Reports have highlighted sharp movements during some expiry sessions after the introduction of CAS. Market participants argued that the new closing mechanism could make it more difficult to manage derivatives positions, particularly when the auction price differed significantly from the price traders had expected based on continuous trading.

SEBI has responded by considering changes to the settlement-price formula.

One option under discussion is a blended volume-weighted average price, which would combine trades from the final 30 minutes of continuous trading with transactions executed during CAS. This approach would attempt to balance the stability of the previous methodology with the new auction-based price discovery mechanism.

Another option would temporarily separate derivatives settlement from CAS. Under this method, settlement could again be based on the final 30 minutes of continuous trading, while SEBI continues to evaluate how the auction system should work.

The regulator is also reviewing the broader timing structure.

SEBI has proposed changes that could reduce the period between the end of the closing auction and the end of related market activity. A shorter post-closing period could reduce the time during which prices and trading activity remain disconnected across market segments.

The proposals also address information available to traders. SEBI is considering removing the indicative index closing value during CAS. The concern is that traders could interpret an indicative figure as a final value even though the auction is still in progress.

The regulator has also proposed continuing to provide indicative equilibrium prices for individual stocks, allowing market participants to understand where the auction may settle without providing potentially misleading index-level information.

Order handling is another part of the review. SEBI is considering restrictions on cancellation of limit orders positioned more than 1% away from the reference price. The aim is to reduce unusual order behaviour and strengthen the integrity of the auction process.

The latest proposals show that SEBI is not abandoning CAS. Instead, the regulator appears to be adjusting the framework based on the experience of its first weeks.

This approach could prove important for India’s rapidly growing derivatives market. A settlement price must be transparent, predictable and resistant to short-term distortions. At the same time, the closing price must reflect genuine market interest.

SEBI has invited public comments until October 3. The final rules will depend on feedback from market participants and the regulator’s assessment of the alternatives.

For traders and investors, the most important outcome will be greater clarity around how expiry prices are calculated. For SEBI, the priority will be to establish a closing mechanism that delivers efficient price discovery while reducing unnecessary volatility.

Journalist Details

Jitendra Kumar
Jitendra Kumar is an Indian journalist and social activist from Hathras in Uttar Pradesh is known as the senior journalist and founder of Xpert Times Network Private Limited.