Nilesh Shah, Managing Director and CEO of Kotak Asset Management Company, has provided a measured assessment of the Closing Auction Session (CAS) mechanism, stating that "closing auction has settled but can it be improved further? Answer is undoubtedly yes." According to his interview with NDTV Profit, Shah believes the new mechanism is "broadly on the right track" and will help bring Indian markets closer to global standards. He emphasized that "water will settle down but regulator will have to remain vigilant so that no one takes the advantage," highlighting the ongoing need for regulatory oversight despite the system's stabilization.
The mutual fund industry has identified specific areas for improvement in the CAS mechanism. Shah revealed that the industry has suggested changes to reduce arbitrage fund volatility in CAS pricing, particularly addressing the current timing issue where futures prices are determined at 3:40 p.m., while cash prices are settled at 3:30 p.m. through the closing auction. The industry proposal involves calculating a theoretical futures price using the actual spread traded during a window between 2:45 p.m. and 3:15 p.m., or 3 p.m. and 3:15 p.m., which could then be applied to the closing auction price. Additionally, mutual funds are seeking greater flexibility for their participation in the closing auction, with Shah noting that "some leeway" is necessary to ensure their participation remains meaningful through both active and passive strategies.
The new system has faced substantial resistance from key market participants, with many proprietary trading firms and high-frequency traders staying away, contributing to thinner volumes during the auction. As reported by Business Standard, arbitrageurs have also lost some of their most profitable opportunities because the late-session window for trading stocks and derivatives at the same time has narrowed. The mechanism has already drawn regulatory scrutiny, with the Securities and Exchange Board of India last week barring two firms, including a unit of JPMorgan Chase & Co., from the market for allegedly manipulating prices during the auction. Shah acknowledged that the introduction of CAS will undoubtedly have some impact on market volumes, partly because regulatory action against wrongdoers could drive out activity that was not healthy for the market. However, he described the move as "better late than never" and emphasized that "closing auction is now behind us and our markets will move forward."
The monthly expiry brings additional complexity through single-stock options, where a sharp move in a stock during the auction can turn an option set to expire worthless into one that is in the money. As noted by Maurya Ghelani, a derivatives strategist at Kai Securities in Mumbai, one move can change the settlement completely. Because these contracts are physically settled at expiry, investors could suddenly have to deliver shares or funds. To address this risk, Sebi has previously warned about this risk and has extended derivatives trading beyond the auction, giving investors more time to adjust their positions once there is greater clarity over the closing price and their delivery obligations. This extended trading window provides some relief to market participants navigating the auction-based system.
With the first monthly expiry under the new framework now underway, traders and regulators alike will watch closely to see whether the auction-based closing price mechanism can deliver a smoother, more robust price discovery process. Rollovers stand at 59%, and the put-call ratio is down to 0.83. Foreign institutional investors have added 2.2 lakh contracts in index options, with market sources indicating the tilt is towards the short side despite aggressive writing in 24,200 call and 24,300 call options. The low hit on Aug 19, i.e. 24,026, will be a key level to track, considering the index has seen selling pressure every time it's tried to rise in the last one week. Manappuram Finance, Bandhan Bank, and SAIL will be out of F&O ban today, providing additional trading opportunities for market participants.
