Indian benchmark indices experienced severe volatility during Tuesday's closing auction session, with Nifty witnessing a sharp 2% plunge in indicative price within seconds before recovering losses. According to The Economic Times, Nifty was trading at around 23,172 on Tuesday afternoon before normal trading stopped and closing auction session began. The index saw a sharp spike to 23,342 at 3:20:01, followed by a crash of around 464 points or nearly 2% from that level to 22,879 at 3:20:30. The benchmark index then recovered nearly 240 points to close at 23,119, with overall losses of around 54 points during the closing auction session. This latest incident highlights the ongoing challenges with the newly introduced Closing Auction Session (CAS) system, which has been causing significant market volatility since its introduction in August.
According to The Hindu BusinessLine, Kotak Institutional Equities believes SEBI's proposed changes could address a key concern over the reliance on the Closing Auction Session (CAS) to determine expiry prices. The brokerage noted that the current mechanism has raised concerns because "a short and relatively shallow cash auction currently determines expiry payoffs in the much larger derivatives market." Under one of SEBI's proposed options, the settlement price would be based on trades executed during the last 30 minutes of the Continuous Trading Session (CTS) and the 10-minute CAS, with the two periods weighted according to their actual traded value, with no fixed weight assigned to CAS. As per Kotak, "Instead of letting the relatively short CAS determine 100 per cent of derivatives settlement, SEBI proposes using a broader 40-minute pool of actual trades." The report emphasized that SEBI's future steps are aimed at deepening cash-market participation, improving securities borrowing and lending, and facilitating hedging and arbitrage, with the broader objective of "improving liquidity, price discovery and linkages between the cash and derivatives markets."
As reported by The Economic Times, the last date to submit responses to Sebi's consultation paper is October 3, so the implementation will likely be from October or November this year. According to Jefferies analysts, options premium turnover and orders were adversely impacted during August 2026, but both have recovered in September as option traders had better understanding of CAS. The brokerage noted that index options average daily turnover on the National Stock Exchange and BSE fell 17% and 26% respectively in August compared with July, while option orders declined 30%. However, September month-to-date options average daily turnover was down only 4% from July levels, while orders traded per day were down 9%. Jefferies' report also showed Bombay Stock Exchange options premium turnover and orders traded per day recovering close to pre-CAS levels in September, while index options turnover on the National Stock Exchange also improved. As per The Hindu BusinessLine, the report noted some improvement in trading activity after weakness in August, with second-quarter volumes remaining lower sequentially but activity levels showing signs of recovery from August lows.
According to The Economic Times, Jefferies remains negative on BSE shares due to the overall options industry barely growing over the past two years, while market-share gains appear to be nearing a ceiling, with expiry-day Sensex and Nifty ADTO now at similar levels. The brokerage cited RBI's tightening of bank guarantee norms could adversely impact premium turnover by up to 10% over the next year, adding that BSE will also potentially undergo a management transition by June 2027. These factors contribute to the negative stance on BSE shares despite the positive outlook on CAS changes. As per The Economic Times, Jefferies has retained its 'Underperform' rating on Asia's oldest stock exchange, with a target price of ₹2,940 per share. The target implies more than 13% downside from BSE's previous closing price of ₹3,384. According to CNBC TV18, BSE shares initially gained from hopes of a CAS review but those gains have now nearly disappeared. Manas Agrawal from Bernstein explained that the impact on BSE was two-fold because the settlement was in the cash market, which is dominated by the National Stock Exchange (NSE), with F&O traders now having greater incentive to participate in the underlying stock's closing auction in the cash market.
As reported by The Economic Times, Jefferies prefers Groww shares, citing strong earnings growth levers and recovery in F&O activity. The brokerage has a 'Buy' call on the shares of Groww-parent Billionbrains Garage Ventures and a target price of ₹240 apiece, implying nearly 20% upside potential from the stock's previous closing price of ₹200.24 on NSE. Further, Groww is adding US stocks later in FY27, which the international brokerage estimates could add 5-9% to FY28 earnings. According to The Financial Express, the brokerage expects Groww to benefit substantially if the issues around CAS gets resolved due to about 55% of its revenue from derivative trading. It expects Groww to increase its net profit at 30% CAGR in the FY26-29 period due to growth in broking business from existing clients and increase in market share, new initiatives like margin trading facility (MTF) and wealth management, margin expansion by 10 percentage points and addition of US stocks later in FY27. Kotak Securities also highlighted that stronger margin trading facility (MTF) growth offers some support, with Angel One's MTF book rising around 20% quarter-on-quarter to ₹66 billion, while Groww's has increased about 23% to ₹41 billion. Manas Agrawal from Bernstein noted that the expectation was that once the regulator came and said that we are looking at changes, this would get resolved, with their base case that this gets resolved by the end of September.
According to The Economic Times, from 3:15 pm onwards, these stocks move into the CAS, a 20-minute auction process that runs until 3:35 pm to determine their official closing prices. During this 20-minute auction window, buy and sell orders for eligible stocks are collected and matched at a single equilibrium price. This mechanism is aimed at improving price discovery and reducing the impact of last-minute trades on closing prices, with stocks that are not part of the F&O segment continuing to trade as usual until 3:30 pm. As per The Economic Times, Sebi has proposed two alternatives for determining expiry-day settlement prices for index and single-stock derivatives. Under the first option, the settlement price for both index and stock derivatives would be based on trades executed during the last 30 minutes of CTS and 10 minutes of CAS, while the second option would use only trades executed during the last 30 minutes of CTS, retaining the settlement methodology applicable before CAS was introduced. SEBI has also proposed other changes to make the closing auction smoother, including stopping traders from cancelling orders placed more than 1% above or below the reference price, cutting the post-auction derivatives trading window to five minutes from 10 minutes, and stopping publishing an estimated index closing level during the auction. Jefferies said that returning to a volume-weighted average price, or VWAP, for derivatives settlement — along with tighter rules on cancelling orders — should help reduce sharp price swings near the close on expiry days, with brokerages noting the proposals could lower the risk of sudden price distortions caused by uncertainty over the final settlement price. Bernstein's Agrawal explained that index derivative traders and stock exchanges will prefer the second option, which essentially goes back to the old system, with an added window for passive traders, while the first option may create issues for derivative traders as it extends the futures and options trading window beyond 3:30 pm. According to Kotak Institutional Equities, SEBI could subsequently move to the blended methodology after at least one year, subject to sufficient liquidity, participation and familiarity with CAS.
