Things get a little more complicated from Monday, August 3.

Exchanges are introducing a Closing Auction Session, or CAS, for stocks with F&O contracts. This isn’t a new concept globally. Major exchanges such as the New York Stock Exchange (NYSE) and London Stock Exchange (LSE) already use versions of a closing auction to determine closing prices.

Today, the closing price of a stock in India is based on the volume-weighted average price of trades during the last 30 minutes. Under CAS, buy and sell orders will instead be collected and matched at a single equilibrium price.

The change is meant to address two issues.

First, passive funds tracking indices need to execute large orders near the end of the day to match the closing price. These orders can move prices while they are being executed, increasing tracking error.

Second, large orders placed in the final few minutes can disproportionately influence the closing prices of stocks and, in turn, the indices they are part of. There have been concerns that this can be used to push indices towards certain closing levels. Since CAS pools all orders and matches them at a single price, influencing the close becomes harder.

It also means we’ll now have three different market end times depending on what you’re trading.

Stocks with F&O contracts will stop continuous trading at 3:15 PM and move into CAS.

All other stocks will continue trading until 3:30 PM.

Index and stock F&O contracts will trade until 3:40 PM.

Now that broking is listed and people are looking more closely at the business, the honest bit: this will probably knock off some revenue, perhaps around 1–5% of brokerage income.

The more immediate challenge, though, will be explaining why different parts of the market now appear to close at different times. We’re braced for the flood of questions.

Check out this post to learn more about CAS or watch this video.

Go to link →