India’s newly introduced closing price auction system has left traders jittery, with some calling one of the country’s most significant market structure reforms in recent years a failure in its first week, according to Business-Today. Demands to withdraw the mechanism are mounting, but the regulator has made its position unequivocal: the closing auction will not be rolled back.
The new closedown: how the auction works
The revised closing-price mechanism applies to more than 200 stocks with listed derivatives, Business-Today reported. SEBI first proposed the framework in 2024 after major index-tracking funds sought a closing auction to minimise tracking errors. The regulator has said the new system is intended to strengthen price discovery and bring India’s market structure closer to the practices followed by leading global exchanges.
A choppy first week in numbers
During the first two trading sessions – last week Monday and Tuesday – the closing auction reversed part of the NSE Nifty 50 Index’s intraday decline, resulting in an official closing level that was higher than the index’s position when continuous trading ended at 3:15 p.m. local time, according to Business-Today. By Thursday, the first weekly expiry of the BSE Sensex Index under the revised mechanism was completed with little disruption, and the benchmark finished 0.2% above its 3:15 p.m. level. The difference has narrowed considerably as participation has increased following the regulator’s efforts to encourage the market.
| Trading day | Index | Official close vs 3:15 p.m. level |
|---|---|---|
| Monday | NSE Nifty 50 | Higher than continuous-trading close; auction reversed intraday decline |
| Tuesday | NSE Nifty 50 | Higher than continuous-trading close; auction reversed intraday decline |
| Thursday | BSE Sensex | 0.2% above 3:15 p.m. level |
SEBI’s response: no rollback
Business-Today reported that SEBI convened meetings with several of India’s leading stock brokerages and made its position unequivocal. People familiar with the private discussions told Bloomberg that senior SEBI officials, including board member K.V.R Murty, told market participants that the system was experiencing only early-stage teething problems and expressed confidence that its functioning would improve as more investors participated. During meetings held on Tuesday and Wednesday, SEBI called on brokerages to accelerate technology enhancements and increase participation in the auction process, the Bloomberg report said.
‘My trading system is broken overnight’
Despite the improvement, traders remain uneasy. In the first week, brokerages found themselves responding to a surge of client queries, while retail investors turned to social media after noticing that official closing prices appeared to differ from where stocks had traded during the day, Business-Today reported.
“Strategies that worked consistently for years have been buried alive,” said Aamodh Kuthethur, a retail algorithmic options trader for nearly a decade. “My trading system is broken overnight.”
Market participants believe the sharp price swings are largely the result of limited participation in the new auction process. A number of proprietary trading firms and high-frequency traders, which typically provide liquidity on expiry days, either stayed out of the closing auction or scaled back their activity while the new framework was settling in, according to Business-Today. “Allowing some time for liquidity to develop before shifting to closing auction may have facilitated a smoother transition,” said Mayank Sachan, chief executive officer of Zenskar Research. He added that the proprietary trading firm had cut back its expiry-day strategies linked to index options.
Implications for institutional investors
For finance executives and investors tracking Indian equities, the new auction process alters the way official closing prices are set, a reference point used for portfolio marking and derivative settlement. The narrowing gap between the official close and the 3:15 p.m. continuous-trading level, along with SEBI’s calls for brokerages to accelerate technology enhancements and increase participation, indicates that the mechanism’s stability will depend on liquidity depth in the auction. The regulator’s decision to keep the system, despite demands for withdrawal, means market participants must adapt their execution and settlement processes to the new framework.
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