In Argentine author Jorge Luis Borges’s Spanish short story “On Exactitude in Science”, the pursuit of precision produces a map as large as the empire it represents. Its completeness makes it impractical. Financial benchmarks face a related problem when institutions expect one carefully constructed number to serve every purpose. SEBI’s Closing Auction Session was designed to determine the closing price of shares, but that does not establish its suitability for every contract tied to the close.

The auction’s logic is straightforward. Concentrating buying and selling interest in a dedicated session should help discover a representative closing price. Rather than averaging transactions over a preceding window, it identifies a price that maximises the quantity matched in the auction.

What that price represents depends, however, on who submits orders and why. A passive fund may want to execute near its benchmark close, while a derivatives trader manages exposure whose settlement depends on that close. Both contribute to price discovery, but neither arrives simply to express an opinion about the stock’s underlying value.

This complicates the earlier argument that institutional precision justifies a more elaborate market close. Institutions have different requirements, and improving execution for one group does not automatically establish a better settlement reference for another.

Changing Incentives
Economist Goodhart’s law provides a useful caution about attaching incentives to measures. Once a number becomes consequential, behaviour can change in ways that affect its reliability. That does not make strategic trading improper or establish that the resulting price is distorted. It does mean the benchmark’s uses must form part of its evaluation.

An auction can attract liquidity because its price matters, while that same importance increases the incentive to influence its outcome. The relevant assessment is whether participation and safeguards make the price sufficiently dependable for each assigned use.

SEBI’s October 15 circular has now formalised the separation. From December 7, expiry-day settlement prices for index derivatives will use an index calculated from constituent stocks’ VWAPs over the final 30 minutes of continuous trading. Stock derivatives will settle using the underlying stock’s VWAP over that window across exchanges. CAS will continue determining the applicable cash-market closing prices. Unlike the earlier reported recommendation, the circular specifies no one-year limit or scheduled transition to an auction-linked settlement formula.

Regulatory Judgement
SEBI’s consultation paper on CAS review recognised that official closing prices and derivatives settlement prices could diverge. The adopted separation therefore need not represent a rejection of auctions. It requires an explanation of why different references are preferable and what evidence would support any future change.

The circular also revises the market clocks. CAS will run from 3.30 pm to 3.40 pm, while expiring index derivatives will stop trading at 3.30 pm. Stock derivatives, including expiring contracts, will trade until 3.45 pm. Market orders remain permitted in CAS, but cannot be modified or cancelled from 3.36 pm; order entry will close randomly between 3.38 pm and 3.40 pm. These provisions address trading arrangements and order commitment without restoring the auction’s role in expiry settlement.

That explanation matters after the chairman’s warnings against manipulating CAS, including attempts to manipulate it to “defame it”. Those remarks concerned misconduct, not a general prohibition on criticism. Nevertheless, SEBI should keep its defence of the mechanism separate from its assessment of where the mechanism works best.

A clearer approach would assign each benchmark an explicit mandate, identifying its purpose, the exposures attached to it and the evidence required before its role expands. Published measures of auction participation, execution concentration, indicative-price stability and differences from continuous-session VWAP would help make that assessment visible.

Investors would still face trade-offs. Separate references can create a mismatch between share execution and related derivatives settlement, while a common reference makes both depend on the same price-discovery process.

SEBI should explain those choices and how it will assess the revised framework. Borges’s map became impractical because its makers pursued completeness without sufficient regard for use. A closing benchmark need not meet the same fate, provided the regulator establishes where its precision is useful and where another measure remains preferable.