Mumbai's benchmark Sensex index witnessed dramatic intraday price swings during its first monthly derivatives contract expiry since the introduction of the Securities and Exchange Board of India's (SEBI) new Closing Auction Session (CAS) mechanism. On Thursday, the index plummeted more than 2,200 points in minutes before recovering nearly 2,000 points within the CAS window, eventually closing down 539 points at 76,934.
The Nifty 50 also recorded sharp movements during the corresponding period, though less pronounced than those on the BSE. It fell over 100 points before recovering approximately 50 points, ending the session down 117 points at 24,091.
Closing Auction Session Explained
SEBI implemented the CAS mechanism on August 3 as a new method for determining the closing price of approximately 200 stocks eligible for equity derivatives trading. Under CAS, these eligible stocks enter a closing auction after regular trading hours, where orders are matched to establish the final closing price. The system aims to enhance the price-discovery process and minimize the impact of last-minute orders on closing valuations.
Several prominent Sensex constituents also experienced considerable price fluctuations during the CAS window. Reliance Industries, the index's heaviest-weighted stock, saw its value drop from around Rs 1,280 to Rs 1,250 within minutes, only to recover and close at Rs 1,288. Other major stocks like HDFC Bank, ITC, and Bharti Airtel similarly recorded sharp movements.
Why SEBI Introduced CAS
SEBI Chairperson Tuhin Kanta Pandey has characterized CAS as a significant market microstructure reform, noting that similar mechanisms are already in place in several major global markets, including Japan, Hong Kong, the US, Germany, Europe, and Australia.
Pandey emphasized the importance of a reliable closing price for various financial products, including index funds, passive investment vehicles, and the calculation of mutual fund Net Asset Values (NAVs). He highlighted that the CAS mechanism's use of indicative prices and a random closing time provides greater transparency in price discovery and reduces opportunities for manipulative last-minute bids.
“CAS is a transparent mechanism. Its pricing is always visible, and what is happening inside it is visible,” Pandey stated.
Monitoring and Future Adjustments
SEBI is actively engaging with market participants and collecting feedback on the new mechanism. Pandey indicated that the regulator remains open to “tweaking and improving” the system if necessary, while ensuring market participants fully understand its workings. He also noted that the divergence between Sensex and Nifty levels at the end of regular trading and their final CAS closing values has moderated since the mechanism's initial days.