Part Two: Closing Prices Explained – Why the Final Trade Isn’t the Close

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Now let’s look at the dangers of treating LTP as the closing price. 

If LTP determined the official closing price, low liquidity could make the closing price vulnerable to manipulation. A trader could, for instance, buy a single share at 3:29:59 PM (taking the earlier 3:30 PM as the closing time) for Rs 1,000 when the stock had traded around Rs 900 all day, potentially pushing the official closing value sharply higher.

Closing prices matter to index calculation, mutual-fund valuations and derivatives settlement. Basing important financial calculations on a single trade could therefore create scope for manipulation — a practice broadly referred to as “marking the close.”

The move to VWAP

VWAP-based closing price mechanism reduced this vulnerability to an extent. Under this system, the official closing price was calculated as the VWAP of trades executed during the final 30 minutes of continuous trading, from 3:00 PM to 3:30 PM.

Suppose a stock traded at different prices during the final 30 minutes, with different quantities changing hands at each price level. The last trade may be at Rs 105, but if most of the shares traded around Rs 100– Rs 102, the VWAP could be, say, Rs 101.75. Under the VWAP-based system, Rs 101.75—not the LTP of Rs 105—would be the closing price.

However, VWAP introduced a different concern: banging the close.

Deep-pocketed institutional players could execute massive buy or sell orders during those final 30 minutes to drag the weighted average towards a level that benefited their expiring option or futures positions.

In a December 2024 consultation paper, Sebi said that some international passive fund houses had highlighted two problems with the existing VWAP mechanism: it could produce significant price volatilityacross stocks, and there was a high risk that large orders would not be completed, which could add to the tracking difference of a passive fund. (see box)

On index-rebalancing days and derivative-expiry days (see box), massive fund flows hit the market at once. Under continuous VWAP trading, if these large rebalancing orders could not execute near the index’s final closing price, the gap between the fund’s actual transaction price and the index price widens—creating high tracking difference. 

This challenge—preventing late-day volume manipulation while minimising tracking error for passive funds—was one of the reasons that led Sebi to mandate CAS.

CAS enters, but VWAP isn’t dead, long live VWAP!

As far as CAS is concerned, there are three terminologies to take note of and one important point to keep in mind: the closing price is determined through an auction.

The terminologies are reference price, indicative equilibrium price and equilibrium price.

One should not be under the impression that the migration to CAS meant the end of VWAP. VWAP exists under this system also — but only up to a certain point.

In other words, CAS begins where VWAP ends.

The CAS mechanism also changed the market timings. Earlier, the market opened at 9:15 AM and closed at 3:30 PM. Now, there is no change in the opening time. But trading in derivatives segment extends till 3:40 PM.

First, let’s look at the auction window timings and activities.

Under the CAS mechanism, continuous trading in F&O stocks halts at 3:15 PM, and the closing-auction process runs until 3:35 PM to establish the official closing price.

1. Transition Phase (3:15 PM–3:20 PM): System preparation and order-state handovers.
2. Order Entry Phase (3:20 PM–3:25 PM): Traders enter, modify or cancel market and limit orders. No execution occurs yet.
3. Limit-Order Phase & Random Close (3:25 PM–3:30 PM): Only limit orders are accepted, with order entry ending at a random point between 3:28 PM and 3:30 PM to prevent last-second order activity from influencing the auction.
4. Order Matching (3:30 PM–3:35 PM): The exchange matches buy and sell orders from the auction order book at a single price that allows the maximum number of shares to be traded. This price, known as the equilibrium price, becomes the stock’s official closing price.

Now, let’s look at the terminologies.

Reference price is the price from which the auction starts. Under CAS, it is based on the VWAP of trades during the 3:00 PM–3:15 PM period. It helps define the operating price bands for auction orders.

Indicative equilibrium price is the live, provisional estimate shown as the auction order book develops. It tells you: “If the auction ended now, this would likely be the closing price and this would be the volume.”

Since orders can be added, modified and cancelled, it can change.

Equilibrium or closing price is the final price determined in the matching phase. It is the price at which maximum executable volume occurs, and that becomes the official closing price for the stock.

Maximum executable volume refers to the highest number of shares that can be matched at a single price in the auction, and the equilibrium price is the price at which this happens.

The closing time brain-wrecker

Now one question remains: if CAS ends at 3:35, what runs till 3:40 pm?

Well, take a deep breath! Now read.

For the purpose of CAS, let’s divide stocks in the cash segment as three:

1. Plain-vanilla stock – with no F&O contracts. For example, Tata Technologies
2. Stocks with F&O contracts  – Reliance Industries is an example
3. Stocks with F&O contracts, but not part of Nifty.  Suzlon is one example

In the first category, trading continues as usual – till 3:30 PM. 

In the second, cash trading stops at 3:15 pm. So, Reliance the stock in the cash segment, stops trading at 3:15 PM: Then CAS starts at 3:15 PM and closing price is fixed by 3:35 pm. In the F&O segment, Reliance continues trading till 3:40 pm. 

The third category gets the same CAS treatment as Reliance in the cash market. So, Suzlon stops trading at 3:15 pm, then it becomes part of CAS till 3:35 pm, and it trades in the F&O segment till 3:40 PM. But there is no Nifty 50 index calculation involving Suzlon as it is not a Nifty 50 stock.

Since all Nifty 50 constituents have individual-stock F&O contracts, their continuous cash-market trading stops at 3:15 pm and moves into CAS. Therefore, during the CAS interval, the Nifty spot index no longer reflects normal continuous cash-market price discovery in its constituents. A trading platform may continue displaying the last or disseminated index value, but that should not be described as ordinary live spot trading. Meanwhile, Nifty futures and options continue trading until 3:40 pm.

Still don’t get it? These are initial days. Even traders are only getting used to it. That’s why even Sebi was saying in the initial days that it was open to making tweaks. On August 17, however, Sebi Chairman Tuhin Kanta Pandey, said “CAS is here to stay.” 

One remaining piece in this puzzle would be if other exchanges in the world have been running it, why is India finding it difficult? That’s where liquidity issues and stuff like Stock Lending and Borrowing Mechanism (SLBM) comes into play.

But then that’s a different story, for a different day. For now, let’s be clear that this innocuous-sounding term, closing price, is not so innocent.

Disclaimer: The opinions and views expressed in this article/column are those of the author(s) and do not necessarily reflect the views or positions of South Asian Herald.