The Securities and Exchange Board of India (SEBI) has announced a significant change to how closing prices are determined in the equity markets. Starting August 3, 2026, the regulator will introduce a Closing Auction Session (CAS) to replace the current volume-weighted average price (VWAP) methodology used in the final minutes of trading.

New Auction-Based Framework

The CAS represents a fundamental shift from the existing system that calculates settlement prices based on VWAP from trades executed during the final minutes of continuous trading. This change aligns Indian markets with international best practices, as similar auction-based closing mechanisms are employed by many of the world's largest organized exchanges.

The primary objectives behind this implementation include:

• Enhanced transparency in price discovery
• More robust and efficient closing price determination
• Reduced potential for price manipulation during end-of-day trading
• Improved accuracy in derivatives settlement

Implementation Structure and Timeline

The CAS will operate as a standalone session, separate from continuous trading. The structure includes multiple phases: an order entry phase, followed by a random closing phase designed to prevent strategic last-minute order placement, and finally a match trading phase where transactions occur at a single equilibrium price.

Phased Implementation Approach

SEBI has designed a phased rollout to ensure orderly adoption of the new framework. Phase 1 will focus exclusively on equity stocks currently listed for derivatives trading. This targeted approach recognizes that these stocks are primarily used to compute derivative contract prices, making them the logical starting point for implementation.

The expansion to cover all other equity market stocks will occur only after the successful implementation of CAS for derivative-linked securities. This measured approach allows market participants to adapt gradually while maintaining market stability.

Trading Parameters and Controls

During the CAS, market participants will be limited to two order types: market orders and limit orders. This simplified structure aims to facilitate ease of participation and execution while maintaining orderly trading conditions.

To manage volatility, the session will incorporate a price control band of plus or minus 3% based on the reference price. This reference price will be calculated using the VWAP from trades executed between 3:00 pm and 3:15 pm during the continuous trading session.

Impact on Derivatives Settlement

The new framework promises significant improvements in derivatives settlement processes. Closing prices determined through the auction mechanism will be used to settle both stock and index derivatives, replacing prices derived from continuous trading sessions.

This change is expected to:

• Improve settlement accuracy for financial instruments
• Reduce impact of temporary price distortions
• Benefit institutional investors, index funds, and passive investment strategies
• Minimize dependency on potentially manipulated closing prices

Market Alignment and Future Implementation

The introduction of CAS represents part of a broader initiative to enhance market structure. Following the August 3, 2026 implementation of the Closing Auction Session, SEBI plans to introduce a Pre-Open Auction Session on September 7, 2026. This timeline ensures consistency in auction-based price discovery mechanisms at both market opening and closing.

The implementation of this auction-based closing process is expected to substantially improve market transparency, fairness, and efficiency by aggregating orders and determining single closing prices through the auction mechanism, while reducing the potential for manipulation during critical trading periods.

Market makers function as essential institutional participants in India's capital market ecosystem, ensuring securities can be bought and sold smoothly without sharp price disruptions. These entities provide continuous liquidity by maintaining readiness to buy and sell specific stocks, playing a particularly crucial role in India's SME segment where liquidity varies significantly from large-cap stocks.

Regulatory Framework and Definition

Under Regulation 261 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, market making is compulsory for SME IPOs. A market maker must be a SEBI-registered stockbroker empanelled with either BSE SME or NSE Emerge, obligated to provide continuous two-way quotes in specific SME-listed securities.

Financial Requirements and Eligibility

SEBI has established strict eligibility criteria to ensure only capable entities undertake market making responsibilities. As per NSE Circular No. 65/2024 dated October 14, 2024, net worth requirements are structured based on the number of SME companies handled.

Market makers must be independent of the issuer and cannot be related to promoters or promoter groups, ensuring no conflict of interest exists.

Inventory Management and Trading Limits

Beyond the mandatory 5% inventory allocation, SEBI prescribes upper limits on market maker holdings based on IPO size. These thresholds determine when market makers must cease buy orders and focus on selling to reduce inventory levels.

Market Impact and Scope

Market makers significantly impact India's SME segment by reducing bid-ask gaps and preventing situations where investors cannot exit holdings. Their presence ensures retail investors holding shares worth less than ₹1 lakh can exit positions completely, as market makers must purchase entire holdings in one lot.

The role remains stock-specific rather than market-wide. Compulsory market making applies primarily to SME-listed stocks, while Main Board stocks typically enjoy adequate liquidity through higher trading volumes and institutional participation. Every SME company must appoint a market maker at IPO time, with the number capped at five per stock to ensure orderly competition.

Future Developments

Brokers have recently urged SEBI to extend equity-style market-making frameworks to commodity derivatives segments. This proposal aims to improve liquidity in commodity contracts such as gold, silver, and crude oil, potentially narrowing bid-ask spreads and reducing trading costs while fostering inter-exchange competition in India's commodity trading ecosystem.