The Securities and Exchange Board of India’s (Sebi) decision to review the closing auction session (CAS) mechanism, especially on expiry days, after a month of sharp price swings and tepid participation has given significant relief to market players.
In fact, the prospect of changes to CAS cheered trading-linked stocks on Friday. BSE shares climbed 3.14%, while brokerages also rallied, with Angel One gaining 4.2% and Motilal Oswal Financial Services and Groww rising about 2% each.
The review comes after a series of sharp swings in the indicative closing prices of the BSE Sensex and NSE indices, particularly on weekly and monthly expiry days. The latest episode came on Thursday, when the Sensex’s indicative closing price swung by nearly 4,000 points during the weekly expiry.
Market experts have suggested a range of measures to curb such volatility, including a hybrid settlement mechanism, tighter price bands and aligning the closing times of the cash and derivatives markets.
Rajesh Palviya, head of research at Axis Securities, said that while CAS brings India closer to global best practices by pooling end-of-day liquidity to arrive at a single equilibrium price, relying entirely on that price for derivatives settlement can create vulnerabilities on expiry days.
Last-minute order imbalances can disproportionately influence the closing price and trigger sudden volatility, he said.
Palviya suggested a hybrid mechanism combining the CAS closing price with the 30-minute volume-weighted average price (VWAP). Such a system, he said, could preserve the liquidity benefits of an auction while reducing distortions caused by dependence on a single closing price.
The mismatch between the closing times of the cash and derivatives segments has also emerged as an area for possible reform.
Tejas Shah, head of trading at Equirus Securities, said that since the underlying cash market and derivatives are closely interconnected, aligning their closing times could help curb forced trades and the triggering of stop-loss orders.
BSE’s managing director and chief executive officer Sundararaman Ramamurthy told CNBC-TV18 on Thursday that participation in CAS had been lower than expected, contributing to volatility, and that considerable improvement was needed.
According to Ramamurthy, market participants have proposed several changes, including delinking derivatives settlement prices from the CAS-determined closing price, using VWAP for derivatives settlement while retaining CAS for the cash market, restricting the auction to stocks outside the top 500, and narrowing the current 3% price band on either side of the reference price.