Sebi Chairperson Tuhin Kanta Pandey recently outlined the critical role of the Closing Auction Session (CAS), describing it as a major reform to India's market microstructure. Speaking on Wednesday, Pandey addressed concerns regarding price discrepancies between regular trading and final closing prices, emphasizing CAS's design to overcome the limitations of the earlier Volume-Weighted Average Price (VWAP) methodology.
Pandey highlighted that India had lagged behind many global counterparts in implementing such a mechanism, noting that countries like Japan, Hong Kong, the US, Germany, Europe, and Australia already utilize similar systems. The primary goal of CAS is to establish a more reliable closing price, which is essential for various financial products, including index funds, passive investment strategies, and the calculation of mutual fund Net Asset Values (NAVs).
Addressing Market Manipulation
The previous VWAP-based system was vulnerable to manipulation, particularly a practice known as "marking the close." This illegal tactic involves executing small trades at the very end of a trading session to artificially influence a security's or index's closing price. Pandey explained, "If a small trade comes in at the last minute, it disproportionately impacts the price." CAS was introduced to mitigate such risks.
"CAS is a very big microstructure reform, and we have actually lagged behind. Many of our global counterparts have already done this." — Tuhin Kanta Pandey, Sebi Chairperson
The new mechanism enhances transparency by providing greater visibility into the price discovery process through indicative prices. A key feature of CAS is its random closing time, which further reduces the potential for last-minute bids to sway the final outcome. "CAS is a transparent mechanism. Its pricing is always visible, and what is happening inside it is visible," Pandey affirmed.
Monitoring and Future Adjustments
Sebi is actively engaging with stakeholders and continuously monitoring feedback on the CAS mechanism. Pandey indicated that the regulator is open to making adjustments if necessary. "If there is a need to tweak it and improve it, we will also see that," he stated, stressing the importance of market understanding and vigilance.
He also observed that the initial differences between Sensex and Nifty levels at the close of regular trading and their final CAS-determined values have moderated since the system's introduction, indicating a period of stabilization and adaptation.