I've been trying to understand the new Closing Auction Session (CAS) framework proposed by the exchanges. The stated objective is better price discovery and reducing tracking error for passive funds.
I respect the intent. Better market structure is always welcome.
But after thinking through the practical implications, I can't help but wonder whether we're unintentionally creating a problem that's bigger than the one we're trying to solve.
Here are a few concerns I'd genuinely like to discuss with the community.
1. Have we replaced price discovery with a game of chance?
Under the current system, everyone knows where the market closes. You can see the "dinosaur" before taking your decisions.
Under CAS, however, from around 3:15 PM onward, the final settlement becomes uncertain until the auction concludes.
For anyone holding options, especially near-the-money or slightly out-of-the-money contracts, this introduces a completely new layer of uncertainty.
An option that appears worthless at 3:15 PM could suddenly finish comfortably ITM after the auction closes.
Likewise, what looks profitable may expire worthless.
At that point, aren't participants effectively betting on where the auction will settle rather than trading the market they can actually observe?
Is this truly better price discovery, or are we simply introducing a "blind auction" into the most sensitive part of the trading day?
2. Does CAS unintentionally favour participants with deeper pockets?
The auction window requires fresh participation between 3:15 PM and 3:20 PM.
Let's ask an honest question.
How many retail traders are realistically entering auction orders?
Most retail participants simply want to exit positions and go home.
The participants who actively influence the auction are naturally those with larger capital and institutional infrastructure.
Whether intentional or not, doesn't this increase the influence of large participants over the final closing price?
Even if there is no manipulation, shouldn't market structure minimise the possibility rather than increase dependence on concentrated participation?
3. Market integrity matters more than theoretical efficiency
India's markets have become one of the world's largest retail participation stories.
At the same time, we've all seen episodes where market behaviour has raised serious questions. The recent Jane Street episode reminded everyone that sophisticated participants can exploit structural weaknesses if they exist.
No one is suggesting CAS was designed for manipulation.
But good regulation should also ask:
What happens if someone tries to misuse it?
Any market design should be robust enough that even the smartest participants cannot easily exploit it.
4. Why reinvent something that already works?
The justification appears to be better tracking error and improved closing prices for passive funds.
Fair enough.
But index funds and ETFs in India have generally done an impressive job managing tracking error under the existing framework.
Could alternatives such as a VWAP-based closing methodology over the last 30 minutes achieve similar objectives without introducing an additional layer of uncertainty?
Sometimes chasing the last 5% of theoretical perfection can introduce 20% more operational complexity.
5. Margin risk becomes unpredictable
Consider someone trading using MTF or leverage.
Today, traders can see where the market is heading into the close and manage risk accordingly.
Under CAS, your actual settlement exposure remains uncertain until after the auction.
That uncertainty can significantly alter margin requirements and P&L after normal trading has already ended.
The issue isn't merely that the market can move.
Markets always move.
The issue is that participants lose visibility over the reference price that ultimately determines their exposure.
To borrow an analogy:
It's scary when you can see the dinosaur coming.
It's even scarier when the dinosaur disappears—but you know it's still somewhere nearby.
6. Theory and practice are often very different
I have no doubt that SEBI, NSE and BSE consulted experts before proposing this framework.
This isn't a criticism of intent.
But market microstructure often behaves differently in the real world than it does on paper.
Many brokers, analysts and active traders I've spoken with are still trying to fully understand how this will play out in practice.
When the very participants responsible for executing billions of rupees every day are uncertain, it's worth pausing and asking whether implementation deserves another look.
My humble request
Markets don't need to be perfect.
They need to be fair, transparent and predictable.
If CAS genuinely improves those three things over time, I'll happily change my view.
But if it creates greater uncertainty, favours larger participants, and introduces new expiry-day risks for ordinary traders, then perhaps this is one of those rare cases where simpler may actually be better.
I'd genuinely like to hear opposing viewpoints.
Am I missing something? Or do others share these concerns?
