CapitalMind CEO Deepak Shenoy has publicly questioned the Securities and Exchange Board of India's (SEBI) recent stance on what constitutes market manipulation within the newly introduced Closing Auction Session (CAS). Shenoy specifically argued that merely placing buy or sell orders at the highest or lowest permitted prices during CAS should not, by itself, be considered evidence of manipulative intent.
SEBI's Interim Order and Allegations
Shenoy's comments come in the wake of SEBI's first interim order issued on August 19 against two entities, Copthall Mauritius Investment Ltd and Mansi Share and Stock Broking Pvt Ltd. These entities were accused of alleged manipulation during the CAS on August 13, a day when weekly Sensex derivative contracts were set to expire. SEBI's investigation highlighted potential vulnerabilities in the CAS mechanism, which was introduced on August 3.
The regulator alleged that Copthall placed aggressive buy orders across Sensex constituents, while Mansi placed large sell orders below the reference price, with most orders being cancelled within seconds. SEBI claimed these actions were intended to influence the index and benefit their Sensex options positions. The regulator estimated alleged wrongful gains of ₹2.96 crore for Copthall and ₹71.65 lakh for Mansi, concluding that the Sensex would have closed significantly lower based on Nifty 50 values.
As a result, SEBI ordered the impounding of these alleged gains, barred both entities from participating in the equity CAS, and imposed restrictions on their assets and accounts. However, SEBI also clarified that there was no prima facie evidence suggesting the two entities acted in concert.
The Logic Behind Extreme CAS Orders
Deepak Shenoy contends that placing limit buy orders at the highest possible price, or sell orders at the lowest, can be a perfectly logical and legitimate strategy within the CAS framework. He explained that such orders are designed to ensure execution at the eventual equilibrium price, rather than at the extreme price specified by the participant.
“The regulator might want to tone down the accusation that placing buy orders 3% above reference price is bad. No, it's the only way to try and guarantee execution,” Shenoy stated.
He further elaborated that a high-priced buy order signals a willingness to buy at any price below it. During the auction, after market orders are offset, remaining orders are matched by prioritizing the lowest-priced sell orders against the highest-priced buy orders. This strategy gives a participant priority in the order queue, with the actual transaction occurring at the CAS equilibrium price, not the extreme limit price.
Distinguishing Order Placement from Cancellations
Shenoy also highlighted that such extreme orders are not uncommon in the CAS, suggesting they are an inherent feature of the auction mechanism rather than immediate proof of manipulation. He emphasized that the equilibrium price is determined by the interaction of all buy and sell orders, not solely by the most extreme quotes.
However, Shenoy did distinguish between the placement of orders and their subsequent cancellation. He suggested that cancellations after a certain point in the auction could indeed be problematic. He proposed that India might consider adopting restrictions similar to Hong Kong, where cancellations are prohibited during the final minutes of the auction session. Shenoy concluded that other allegations in the case should be assessed only after the entities have presented their full defense.