SEBI says closing auction session is here to stay: What it means for stock market investors

Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey on Thursday said the regulator will retain the newly introduced closing auction session (CAS), even as it reworks the methodology for determining the settlement price of derivative contracts on expiry days following sharp swings in the headline indices.

SEBI is reviewing whether the settlement price for futures and options contracts should be determined differently after market participants raised concerns over the impact of the current mechanism on expiry-day trading and liquidity.

Speaking on the sidelines of the Global Fintech Fest in Mumbai, Pandey said, "MSCI acknowledged that the (recent) rebalancing went well under CAS. CAS is here to stay. The methodology for determining the closing price under CAS for derivatives on expiry day is being reworked."

The chairman said the implementation of the mechanism had worked smoothly from a technical perspective, particularly during the recent MSCI rebalancing exercise. However, he acknowledged that a section of the market has been affected by the way the settlement price is currently determined.

“We have had several participants who have absolutely praised that implementation of CAS—that MSCI rebalancing and all have gone off very well. Technically, the whole thing went off well. Now, there is a certain segment of the market that gets impacted because of the way we kept the settlement price as completely dependent,” said Pandey.

CAS is here to stay

While making it clear that SEBI does not intend to roll back the Closing Auction Session, Pandey said liquidity challenges following its introduction remain a key concern.

“CAS is here to stay…the only question is of liquidity. Many market participants have told us about the rollout of CAS in all jurisdictions, including the US, Japan, Hong Kong, and they have told us that initially, everywhere, wherever CAS was brought in, liquidity was always an issue. It builds up over time,” Pandey stated.

Pandey also said the regulator was studying the experience of other markets where the mechanism had been introduced.

"The rollout of CAS across jurisdictions has faced challenges. Initial liquidity has been an issue everywhere following the rollout of CAS. Liquidity builds up over time," he added.

SEBI had earlier said it was closely monitoring the functioning of CAS during its first month and had held discussions with a wide range of market participants, including stock exchanges, brokers, proprietary traders, software vendors, mutual funds, industry associations, and foreign portfolio investors. The regulator also received feedback through social media and other media platforms.

SEBI using AI for market supervision

Apart from the CAS and derivatives settlement-price review, Pandey also outlined SEBI's plans to strengthen its use of artificial intelligence in market surveillance and supervision.

The regulator is working to implement an AI supervisory toolkit developed by the International Organization of Securities Commissions (IOSCO) in India's securities market. The framework is expected to help regulated entities manage risks arising from AI and establish an appropriate governance framework.

Addressing a panel at the Global Fintech Fest, Pandey said, “AI can help regulators. We are using certain AI tools—they can help us see risks earlier, but they should inform regulatory judgment, not replace it. What we can do with AI is, from periodic monitoring, we can move to proactive monitoring. Supervision can be more off-site than on-site and near real-time rather than periodic,” he added.

SEBI's technology push comes as financial firms increasingly deploy AI across trading, risk management, compliance, and customer-facing services, creating new supervisory and operational challenges for market regulators.

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