CAS is here to stay, liquidity builds up over time, says SEBI’s Tuhin Kanta Pandey

Reports coming in for today mention that Markets regulator SEBI will retain the newly introduced closing auction session (CAS), its chairman Tuhin Kanta Pandey stated on September 10 and stated the regulator is only seeing if F&O settlement price could be based differently.

Speaking on the sidelines of Global Fintech Fest in Mumbai, he told reporters, "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 rollout of CAS across jurisdictions has faced challenges. Initial liquidity has been an offering everywhere following the rollout of CAS. Liquidity builds up over time," he further noted.

Pandey's comments came while indicative closing marks for benchmarks Nifty 50 and BSE Sensex briefly jumped over 1% elevated during the CAS on September 10, compared with a slight loss after the end of normal trading at 3:15 p.m. IST.

The Nifty 50 settled 0.2% elevated at 23,477.8 and the BSE Sensex further noted 0.19% to 74,902.59.

The volatility was anticipated to be elevated in Sensex amid the expiry of its weekly derivatives contracts. CAS, introduced in early August, has amplified last-minute swings in Indian stocks, given the relatively thinner liquidity during the session.

The benchmark indexes were largely muted throughout the regular market session on Thursday.

On September 8, the benchmark Nifty 50's indicative close declined as much as 1.8% during the closing auction, after the index settled down 0.58% at 3:15 pm ahead of the auction.

The 50-stock index, that stated, pared losses and ended 0.61% softer at 23,635.1, while the BSE Sensex lost 0.73% to 75,577.58.

Last week, indicative close for Sensex briefly ‌dropped 2.5%, according to BSE's website. This caused premiums on some of BSE Sensex's put options to spike between 400% and 500% during closing auction.

Last week, the market regulator stated it would review the methodology for determining settlement prices of derivatives contracts after receiving feedback on the closing auction session in the equity cash market.

The Securities and Exchange Board of India had rolled out the closing auction session on August 3 to determine the closing prices of securities.

But the rollout highlighted issues such as divergent index closing marks across exchanges, volatile options pricing, and concerns over potential manipulation, particularly on days when benchmark derivatives contracts expire.

The regulator stated it has received feedback from various stakeholders, and would propose certain changes in the methodology for determining settlement prices of derivative contracts.

SEBI would additionally offering a discussion paper outlining the proposed changes within a week.

Introduced on August 3, the CAS is a brief end-of-day auction in which buy and sell orders are matched to determine a stock's official closing price. Similar mechanisms are used in other Asian markets including China, Taiwan, Hong Kong and South Korea.

The system replaced a methodology under which closing prices were based on the average price of trades executed during the final 30 minutes of continuous trading. Regulators stated the change was intended to align Indian markets with global practices.

Liquidity during the roughly 20-minute process has been thin and largely dominated by institutions. Exchange data revealed CAS trades accounted for less than 1% of daily cash-market turnover and less than a third of volumes noted under the previous system.

In the meantime, Copthall Mauritius Investment Ltd and Mansi Share and Stock Broking have regained access to the broader securities market after depositing the amounts that SEBI impounded in connection with alleged manipulation of the Sensex on BSE during the CAS on August 13.

The amount was deposited on August 20, a day after the market regulator had issued the order against two entities, sources stated.

That stated, both entities keep stay barred from participating in the equity segment’s CAS, directly or indirectly, until further orders.

Copthall, a unit of JPMorgan, deposited Rs 2.96 crore, while Mansi deposited Rs 71.65 lakh. The amounts represented the alleged wrongful upside that SEBI ordered impounded in its August 19 ex-parte interim order.

The regulator's action followed its examination of trading activity during the CAS on August 13, which was additionally the weekly expiry day for Sensex derivatives. The regulator had restrained Copthall from accessing the securities market and applied the market-access restriction to Mansi’s proprietary trading account.