SEBI Considers Blended VWAP to Balance Closing Auction and Derivatives Stability
India’s market regulator is considering a blended volume-weighted average price mechanism as one possible solution to concerns surrounding derivatives settlement following the introduction of the Closing Auction Session.
The proposal represents an attempt to combine the traditional method of calculating closing prices with the newer auction-based system.
Before CAS was introduced, stock closing prices were generally determined using the volume-weighted average price of trades executed during the last 30 minutes of continuous trading. SEBI later introduced the Closing Auction Session to improve liquidity concentration and price discovery near the end of the trading day.
The new system began operating from August 3, 2026, initially affecting securities with derivative contracts.
The change was intended to make closing prices more transparent and representative. By bringing buy and sell orders together in an auction, the system could potentially provide a price that better reflects the overall demand and supply available at the end of the session.
However, the introduction of CAS also exposed a problem involving derivatives settlement.
Expiry-day futures and options contracts depend heavily on the underlying price used for settlement. If the final cash-market price changes sharply during the auction, derivatives positions can experience significant gains or losses.
Market participants reported concerns over volatility and the interaction between CAS and derivatives trading. The issue prompted SEBI to review the settlement methodology.
The regulator has now proposed two broad alternatives.
The first would use a blended VWAP. Instead of relying entirely on the CAS price or entirely on the previous continuous-trading methodology, the settlement price would incorporate trading activity from both periods.
Such a system could potentially reduce the impact of a sudden movement occurring only during the auction. At the same time, it would allow CAS transactions to contribute to the final settlement calculation.
The second option would temporarily rely only on the final 30 minutes of continuous trading for derivatives settlement. This would effectively separate the settlement of derivatives contracts from the CAS mechanism while SEBI evaluates the longer-term framework.
The choice between the two approaches could have significant implications for market participants.
A blended methodology may provide continuity between the old and new systems. However, it could also make the settlement formula more complex because traders would need to understand how transactions from two different market phases affect the final price.
A temporary return to the previous approach could provide greater certainty in the short term. But it would also mean that the cash market’s new closing mechanism and derivatives settlement would operate using different reference-price systems.
SEBI is therefore examining the issue as part of a wider review of CAS.
The regulator has also proposed changes to the duration of the post-closing auction process. A shorter period could reduce the gap between the end of the auction and the conclusion of related trading activities.
Another proposed change relates to market information. SEBI is considering removing the indicative index closing value during CAS while continuing to display indicative equilibrium prices for stocks.
The regulator believes that this could help prevent confusion among traders who might interpret an indicative figure as a confirmed closing value before the auction is complete.
SEBI is also examining the treatment of limit orders. Under the proposal, cancellation of limit orders placed more than 1% away from the reference price could be restricted.
These proposals underline SEBI’s attempt to improve market stability without abandoning the auction-based closing system.
The consultation process will be important because market participants have different interests. Institutional investors may focus on predictable closing prices for portfolio valuation, while derivatives traders may prioritize settlement certainty. Exchanges and brokers will also have to consider operational and technological implications.
SEBI has invited public comments until October 3. The final framework could therefore evolve after feedback from stakeholders.
The broader objective remains unchanged: creating a closing-price mechanism that is transparent, reliable and resistant to manipulation while ensuring that derivatives contracts can be settled fairly.
If implemented effectively, the proposed changes could help resolve some of the tensions that emerged after CAS was introduced. The coming weeks will determine whether SEBI selects the blended approach, the interim continuous-trading methodology or another solution based on stakeholder feedback.
Journalist Details
- Jitendra Kumar is an Indian journalist and social activist from Hathras in Uttar Pradesh is known as the senior journalist and founder of Xpert Times Network Private Limited.
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