[Ayush Raj and Tanay Hindocha are 4th year students of the B.A. LL.B. and BBA LL.B. (Hons.) programmes, respectively, at Gujarat National Law University.]
In August 2025, SEBI floated a consultation paper proposing a major change in India’s closing‐price mechanism: replacing the day’s half‐hour volume‐weighted average price (VWAP) with a discrete closing auction session (CAS). SEBI argues in the paper that CAS would yield “a more stable and less volatile closing price” and align India with global practice. It also claims that auctions improve execution certainty for institutional and passive investors, especially on event days (e.g., index rebalancing). The regulator thus contends that VWAP’s vulnerabilities, e.g., large trades near 3:30 p.m. causing end‐of‐day swings, would be mitigated by aggregating all bids/offers in one auction. We analyze whether SEBI’s empirical case is compelling, whether India’s market microstructure supports the switch, and if a full CAS rollout is the right path forward.
SEBI’s Volatility Argument: Theory vs. Evidence
SEBI’s consultation paper asserts that “data and research suggest” CAS yields “a more stable and less volatile closing price” than VWAP, even with the same total volume. The idea is that VWAP can be skewed by large “targeted” trades in the final minutes of continuous trading, which may abruptly swing prices, whereas a call auction finds a single equilibrium from all orders at once. The paper cites index‐rebalancing days as examples where VWAP volatility “is especially pronounced” because execution timing “can meaningfully impact the price path”. Indeed, SEBI notes that on days with heavy reconstitution or expiry flows, passive funds and hedge strategies may induce extra volatility at the close under VWAP.
However, the paper does not actually cite any published “data and research”, only these general claims. Academic work on closing benchmarks suggests there is no one‐size answer. For example, Frei and Mitra (2020) model when an auction price is optimal versus a VWAP benchmark, finding the best approach depends on the composition of volume and trader strategies. In some scenarios, a traditional VWAP might better reflect aggregate trading interest, while in others a call auction is superior. Similarly, research on European markets has shown that call auctions can reduce transitory volatility and deter manipulation, but the effect is context‐dependent (e.g., Nasdaq Nordic auctions reduced late swings in one study).
In India’s context, the claim that CAS will automatically be less volatile is unproven. On the one hand, concentrating all buy/sell interest into a single auction could indeed smooth out price discovery, if the market participation is broad. In contrast, VWAP under continuous trading “can create sharp intraday price swings” when large orders hit in the final window. The Jane Street episode (2023–25) starkly illustrated how a single player’s order placement can distort index levels in the last hour. This suggests VWAP may sometimes fail to absorb concentrated flows smoothly.
On the other hand, closing auctions themselves are not immune to volatility. If orders are unbalanced (e.g., many more sellers than buyers at the end), the auction price can create a gap. In thinly traded or news‐driven situations, an auction might produce a bigger jump than the VWAP average of earlier trades. SEBI’s paper glosses over this possibility by emphasizing “lower price disruption” in auctions, but provides no empirical volatility comparisons for Indian stocks. Absent such data, the claim that CAS “ensures … the market experiences lower price disruption” remains theoretical.
SEBI’s narrative that CAS reduces volatility is plausible in principle, but SEBI has provided no empirical analysis on Indian data to substantiate it. Academic research suggests the optimal closing benchmark can be either VWAP or auction depending on circumstances. A rigorous case would require modelling Indian trading data, for example, simulating what closing prices would have been under a hypothetical auction, but SEBI’s consultation paper only asserts the outcome. This gap in evidence invites scepticism about the inevitability of volatility gains.
Global Benchmarking: Apples and Oranges?
A major theme of SEBI’s proposal is alignment with global practice. The consultation paper notes that exchanges like the NYSE, LSE, Euronext, HKEX and others all use closing auctions, while India is “the only major market” using VWAP. The implicit logic is that because global peers do it, India should too. In other words, switching to CAS is portrayed as bringing India “in step” with world markets.
Certainly, it is true that most developed stock markets have formal closing auctions. For example, the NYSE’s closing auction regularly handles 5-10% of daily volume, and London’s closing auction is used as the benchmark price for many funds. An auction can help global investors trade large orders without impacting continuous prices and can standardize closing trades across time zones. By that reasoning, harmonizing with global norms could reduce cross‐market frictions.
But global benchmarking is not an end in itself. Indian markets have structural differences that may make a straight copy less effective. Compared to NYSE or LSE, Indian equity trading has a higher proportion of domestic retail traders, two main exchanges with their own matching engines (NSE and BSE), a unique derivatives market (where equity index options and futures drive expiry‐day dynamics), and a fixed 3:30 p.m. closing time. In some global markets, closing auctions also coincide with futures market closes, integrating cash and derivatives more fluidly. In India, equity CAS (3:15-3:35 proposed) would overlap with the last half‐hour of futures trading (which currently runs to 4:00 p.m.), creating coordination questions.
Moreover, international examples offer mixed lessons. The NYSE has periodically adjusted its auction rules (for example, adding volatility extensions to manage order imbalances), suggesting that auctions can introduce their own challenges. On the European continent, closing auctions work well for large-cap stocks, but smaller or less liquid stocks sometimes trade at wider bid-ask spreads in the auction. SEBI’s claim of “cross‑market consistency” should therefore be weighed against the need to adapt any mechanism to Indian liquidity and participation patterns. Simply matching the method of, say, the NYSE does not guarantee NYSE‑like outcomes, since underlying conditions differ.
Execution Certainty and Passive Funds
A third pillar of SEBI’s argument is execution certainty for passive or institutional investors. SEBI notes (and market commentators have pointed out) that passive index funds currently cannot be assured of trading exactly at the VWAP closing price. Under VWAP, a passive fund buying shares to match an index weight may only approximate the closing price, potentially causing a tracking error if the actual closing price deviates from trades it executed earlier. On event days (index rebalances, derivative expiries) this risk is supposedly amplified.
SEBI’s proposal allows passive mutual funds to enter orders during the CAS and “achieve execution certainty at the closing price, without relying solely on block deals”. Indeed, the consultation paper quantifies passive assets under management (nearly 29% of FPI equity AUM) and ties CAS to reducing “tracking error”. SEBI even considers permitting overnight borrowing for funds that end with net short cash positions post-auction, indicating awareness that CAS could leave some passives temporarily without liquidity.
While this rationale has merit, it raises questions. First, one must ask whether the tracking error induced by VWAP is a material problem compared to normal index volatility. Funds already manage tracking with small cash buffers and hedging tools. The consultation paper cites the rise in passive AUM as a motivation, but growth in passive investing is a global trend, and many markets with auctions (or without auctions) have seen similar growth. It is not obvious that VWAP is a glaring outlier cause of tracking shortfalls.
Second, the need for overnight borrowing is telling. SEBI proposes allowing passive funds to borrow overnight to cover shortfall from CAS trades. This is a novel accommodation: currently, funds must settle trades by T+1 and cannot usually borrow stock overnight easily. By acknowledging negative cash risk and seeking comments on a new borrowing route, SEBI implicitly admits CAS could complicate settlement for passives. Critics may wonder: if CAS simply shifts the problem to requiring special lending rules, was a wholesale change of closing price mechanism necessary? Could the same goal of certainty be addressed by, say, extending the VWAP window or permitting more flexible pre-close trades?
CAS can in theory give index funds certainty of the closing price, but SEBI’s own paper shows this comes with caveats (overnight borrowing, limited stock coverage). The regulator must clarify whether the trading strains and system changes needed outweigh the claimed tracking benefits. A data-driven estimate of potential tracking improvement would strengthen the case, but none is provided.
Conclusion
SEBI’s move from VWAP to CAS is driven by sensible policy goals, reducing end-of-day price swings, aligning with global practice, and offering greater execution certainty to large and passive investors. However, the consultation paper leans heavily on theory and analogy rather than India-specific evidence: it asserts that auctions are less volatile without providing empirical simulations or historical counterfactuals for Indian order flow. Global benchmarking is informative but not decisive; market structure differences (retail share, dual exchanges, heavy derivatives activity) mean auction mechanics will not automatically deliver NYSE-like outcomes here. The proposed relief for passive funds including overnight borrowing, acknowledges practical frictions that CAS itself would create, raising the question whether the cure might introduce new risks. Rather than a full-scale, immediate replacement, a pragmatic path, rigorous simulation using Indian data, targeted pilots, and carefully calibrated phased roll-out, or hybrid fixes to VWAP, would better protect market integrity while testing the promised benefits. SEBI’s intuition is defensible; what it now needs is convincing, India-centric evidence and operational proof.
– Ayush Raj & Tanay Hindocha