India's new Closing Auction Session (CAS) mechanism absorbed a record $4.2 billion in MSCI-linked trades on Monday, but sharp price swings persisted despite the surge in volumes. Around 60 stocks hit their 3% price limits, highlighting concerns over thin liquidity and the lack of market makers, which could be crucial for the system's long-term success. According to Business Standard, turnover in the 20-minute window on the National Stock Exchange of India was 33 times the daily average since the system's August 3 debut. The Nifty Bank Index exemplified the sharp swing, with the gauge headed for a third straight day of loss at the start of the auction, but swinging to end the day 0.9% higher by close. Quick-commerce giant Eternal closed flat despite falling 3% ahead of the auction, while index heavyweight Reliance swung from a 0.8% gain before the auction to a 0.8% loss at close.
Market experts are calling for the Securities and Exchange Board of India (SEBI) to pause and fix the Closing Auction Session (CAS) mechanism before continuing its rollout, after Thursday's monthly F&O expiry saw the Sensex swing more than 2,000 points in the final 15 minutes before settling about 250 points lower. According to CNBC TV18, Rohit Srivastava, Founder and Strategist at Indiacharts.com and Strike Money, said the problem is not SEBI's intent but the pace of implementation. He suggested SEBI ask brokers for a clear implementation timeline, stating "You come up with a timeline for all the brokers to implement these apps, and for that time period, you step back." Chandan Taparia, Head of Derivatives and Technicals at Motilal Oswal Financial Services, noted that sudden price swings in the closing window — typically 70 to 220 points on the Nifty and 200 to 500 points on the Sensex — have prompted the firm to advise clients to cut back on option writing near expiry.
The Securities Exchange Board of India (SEBI) has confirmed that the Closing Auction Session (CAS) mechanism is here to stay, even as the market regulator remains open to stakeholder feedback and possible improvements. SEBI Chairman Tuhin Kanta Pandey stated that while CAS is permanent, the regulator will address any constraints or issues that emerge through improvements. According to The Hindu, several industry participants have welcomed the move, as it provides a single price at which trades can be executed, countering criticism over tracking errors. The new mechanism replaces the earlier volume-weighted average price (VWAP) system, though several market participants are yet to upgrade their systems built around legacy processes. Rajesh Baheti of Crosseas Capital warned that concentrating same-day options trading activity into the last 15 minutes risks turning it into speculation rather than genuine trading, and suggested SEBI consider a penalty for last-minute order withdrawals.
The Indian stock market experienced significant volatility on Thursday, with the Sensex witnessing its sharpest swing since CAS implementation, trading above 77,100 until 3:15 pm before the CAS triggered dramatic price movements. During the CAS, the indicative price plunged to as low as 74,988, a drop of around 2,112 points, before recovering to close at 76,933 points. The CAS mechanism has been in place for four Thursdays — August 6, 13, 20 and 27 — with the sharpest volatility occurring on expiry days when derivative positions must be settled against the closing price. Taparia pointed out that cash market trading stops at 3:15-3:20 pm while futures continue trading, which breaks the usual pricing relationship between the two — known as put-call parity — during the auction window. He added that only 1-2% of a stock's full-day trading volume is now happening in the last 30 minutes, which he said undermines genuine price discovery in that window.
The implementation of CAS has significantly impacted market participation, with cash market volumes hitting a five-month low as investor caution grows amid volatility and the new closing auction system. As reported by The Hindu BusinessLine, the average daily turnover (ADT) on the NSE dipped by ₹3,837 crore, or 3 per cent, in August to ₹1,16,579 crore from ₹1,20,416 crore in July. The ADT on the NSE fell to a five-month low in August as investors turned cautious amid sharp price volatility and widespread profit-booking. Persistent stake sales by promoters through bulk and block deals, along with robust IPO activity, also dampened investor appetite for the secondary market. On August 3, SEBI introduced CAS to determine the official closing price for eligible stocks through a single-price call auction, replacing the earlier 30-minute volume-weighted average price method, with the initial framework covering only 208 F&O-eligible stocks.
Despite mounting criticism, SEBI Chairman Tuhin Kanta Pandey has defended the CAS mechanism and signalled there is no immediate plan to roll it back or alter it, with the regulator maintaining that wider participation and improving liquidity will help the system stabilise over time. According to Business Standard, proprietary traders, who account for a third of the turnover on the NSE, have largely stayed away from the closing auction because of several restrictions that make it difficult to short shares, limiting their ability to quote both sides of the market. Mayank Sachan, chief executive officer at proprietary trading firm Zanskar Research, stated "The arrival of market makers could be what finally makes the auction a success." Without market makers, the auction will still produce sharp price moves despite volumes being traded, he explained. The CAS is BSE's new closing-price mechanism, introduced to prevent market participants from artificially influencing a stock's closing price — a practice that was possible under the earlier volume-weighted average price system, where funds and traders could try to match volumes to move the close in their favour.
