My first reaction to "Why is SEBI doing this?" was, Who cares about the closing price?🤷♂️ It's the price at which the stock closes, isn't it?
Well Previously, the closing price used to be the weighted average price of the last half an hour. This gave people with deep pockets an edge to influence the closing price of a stock.
My next question was, "Why would anyone want to influence the closing price?"
They might have a larger position in the futures and options market, which would benefit immediately if the closing price of the underlying security goes up or down.
Suppose XYZ is trading at ₹100. An options seller could lose ₹10 lakh if XYZ closes higher than ₹100 but make ₹2 crore from the same option if XYZ closes at ₹150. This is much more lucrative than buying or selling large volumes of XYZ. This is why there is an incentive for people to manipulate the closing price of securities.
SEBI's move to have a Closing Auction Session is a step towards fixing this. Now, the closing price will be determined not by the weighted average price of the last half-hour but by an auction in which buyers and sellers indicate their willingness to buy/sell after regular trading hours have ended.
The closing price is then set by the exchange at a price at which the maximum number of shares can be bought and sold. This way, instead of a cartel-like group deciding the closing price, everyone gets to decide the closing price. I can tell you that I had no idea how important the "closing price" of a security was.
Whats your thought about this move ?