Introduced on August 3, India's Closing Auction Session (CAS) aimed to bring greater efficiency and transparency to the discovery of closing prices on the share market, replacing the older Volume Weighted Average Price (VWAP) system. The new mechanism, which runs from 3:15 pm to 3:35 pm, with an initial five-minute transition period, was expected to curb volatility and prevent market manipulation.
However, the system has faced unexpected challenges, with market participants observing sharp and sudden price movements. On a recent monthly derivatives expiry, the BSE Sensex experienced a dramatic swing of over 2,000 points within minutes. Traders have voiced concerns, prompting increased regulatory surveillance to investigate potential manipulation.
Regulatory Scrutiny and Expert Observations
The Securities and Exchange Board of India (SEBI) has already taken action, barring two entities, Copthall Mauritius Investment and Mansi Share and Stock Broking, from the securities market. These entities were ordered to deposit a combined Rs 3.68 crore following allegations of manipulative trading during a Sensex CAS on August 13, where aggressive buy and sell orders allegedly caused significant spikes in the indicative equilibrium price.
Trivesh D, Chief Operating Officer of Tradejini, acknowledged CAS as a step towards transparency but raised questions about liquidity and price discovery, especially during early expiry sessions. He highlighted extreme moves in specific options, such as Dixon Technologies' 15,000 call option, which saw a drastic shift from Rs 2.65 to Rs 104.90 before closing at Rs 0.05 on August 25. Similar volatility was noted in Sensex call and put options on the monthly expiry day.
Factors Contributing to Volatility
Experts point to several factors contributing to the observed volatility. Hariselvan Radhakrishnan, founder and CEO of HST Wealth, suggested that initial divergences between Sensex and Nifty might reflect differences in market liquidity, with institutional order flows concentrated more in Nifty. Trivesh D added that lower trading volumes in the BSE cash market compared to the NSE could make closing prices more susceptible to individual orders and sudden shifts in demand and supply during CAS.
“If two entities can have a significant impact on the index during a thin auction window, the question is whether this creates a better window for price discovery or also a window for price manipulation,” Trivesh D questioned, highlighting the vulnerability of the system with limited participation.
A Work in Progress
Despite the initial turbulence, market experts remain optimistic that CAS is a work in progress and its issues will be addressed over time. Radhakrishnan believes that any new system requires time for understanding and calibration, expecting volatility to reduce within a few months as participants adapt. He also stressed the need for greater transparency and disclosure of order flows during CAS.
Trivesh D echoed this sentiment, suggesting that increased and more diverse participation would make it harder for any single entity to influence prices significantly. Broking platforms are also contributing by simplifying CAS for traders, offering dedicated indicators, dashboards, and improved order queuing mechanisms to enhance visibility and ease of use.