An auction works better when orders arrive early, but this creates a dilemma for a large fund
| Photo Credit:
Swapan Mahapatra
SEBI has changed how the official closing price is determined for shares on which futures and options are available. Now, regular cash-market trading in these shares ends at 3.15 pm, followed by an auction. Broadly, the price at which the maximum quantity can be matched becomes the official close. Most discussion has focused on whether this will improve price discovery and help institutions execute large orders more smoothly.
The first few sessions have produced sharp moves, an unusual divergence between the Nifty and the Sensex, and uncertainty in option premiums. A few days are too few to tell us how the system will eventually settle. Will institutions reveal their orders early or wait? There are useful precedents. The Paris Bourse introduced a closing auction for actively traded shares in June 1998, while Borsa Italiana followed in December 2001.
Research found that activity, volatility and bid-ask spreads declined during the final minutes of regular trading as orders moved into the auction. As the auction became more important, however, traders also began changing the timing of their orders and reacting to the information visible on the screen.
When orders reveal much
An auction works better when orders arrive early, but this creates a dilemma for a large fund. Placing a substantial buy order early may attract sellers and improve the chance of completing the purchase. It also reveals the presence of a large buyer, making other participants less willing to sell cheaply. Evidence from Paris suggests that some traders responded by waiting. Buyers sometimes delayed orders until selling pressure lowered the provisional price, while sellers waited for buying interest to lift it. India’s auction tries to discourage such last-second behaviour through a random close near the end of the order-entry period. Even so, institutions may split large orders, use price limits or wait to see how the provisional price develops before revealing the rest of their demand.
Earlier, the opportunity lay in anticipating institutional activity during the final 30 minutes. Now, it may lie in judging when large orders will enter the auction and how much buying or selling remains hidden. The exchange displays a provisional closing price, the likely quantity to trade, and the gap between unmatched buy and sell orders. A large excess of buy orders may attract sellers and help the auction discover a price. But the same information also becomes a signal. In 2022 in the US, the Securities and Exchange Commission found that a trader had entered orders which he did not intend to execute, creating a false picture of buying or selling interest in the New York Stock Exchange’s closing auction before cancelling them. India may not see the same behaviour. But surveillance cannot stop at the auction screen; it may also need to examine related positions in shares, futures and options.
Volatility may shift
Closing auctions do not erase sharp moves. They may change where those moves occur. If institutions hold back orders for the auction, trading before 3.15 pm may become quieter, and the gap between the last regular-market price and the official close may become more noticeable on some days. In the US, the share of trading conducted through closing auctions rose from about 3 per cent in 2010 to around 10 per cent in 2019. More liquidity at the close attracts more traders and generally makes it easier to complete large orders. But the same concentration can create temporary price pressure when buying or selling becomes heavily one-sided. Some of that pressure may reverse later. Such gaps will also attract arbitrageurs.
If prices differ across exchanges, or between shares and futures, traders can buy where the price is lower and sell where it is higher. Their attempt to profit from the difference may gradually narrow it, making later auctions more efficient. Derivatives traders may react differently. Sharp movements in option premiums marked the initial sessions as traders grappled with uncertainty over the final index level. For ordinary investors, a sudden move during the auction does not necessarily mean that the underlying business became more or less valuable in 20 minutes.
SEBI has changed how the market arrives at its closing price. The market will now learn how to use the mechanism, how to profit from it and, inevitably, how to work around it.
Saravanan is a Professor of Finance and Accounting at IIM Tiruchirappalli, and Manas is an Associate Professor at Goa Institute of Management
Published on August 9, 2026
