On Friday, the Sensex rose approximately 200 points in the final minutes before the closing auction, a stark contrast to Thursday's sharp decline during the monthly derivatives expiry. The index had plunged from around 77,200 at 3.17 pm to nearly 74,983 at 3.23 pm, later closing 539 points, or 0.7%, lower at 76,934.
The Thursday crash, occurring during the first monthly derivatives expiry after the introduction of the Closing Auction System (CAS), unsettled traders. The extreme move was attributed to expiry-day positioning and thin auction liquidity rather than a fundamental flaw in the new system. CAS, which determines closing prices through an auction, makes the final minutes crucial, especially on expiry days.
Sebi Chairman Tuhin Kanta Pandey stated that the regulator is not considering changes to CAS, emphasizing that market participants will adapt to the new system over time. The system relies on sufficient participation from various market players, and thin participation can lead to significant price movements.
“CAS has been introduced with a good intention.”
Hitesh Rathi, Technical Analyst of Equity & Derivatives at Angel One
Hitesh Rathi, Technical Analyst of Equity & Derivatives at Angel One, noted that while CAS was introduced with good intentions, the BSE's limited share of cash market volumes might have contributed to the volatility. Earlier concerns about CAS were raised by Sebi, which flagged potential manipulation during an auction session on August 13.
The unease around CAS is not new, with Sebi previously identifying sharp spikes in the Sensex during auction sessions. Copthall Mauritius Investment, owned by JPMorgan Chase, was identified as a dominant buyer during one such session, accounting for 86.6% of the gross buy value in Sensex constituents.
Background
The introduction of the Closing Auction System (CAS) aims to provide a more transparent and efficient method for determining closing prices. However, its implementation has raised concerns due to the potential for significant price movements during low participation periods.
As market participants continue to adapt to CAS, the focus will be on ensuring adequate participation to prevent similar volatility. Traders and investors will be closely watching future expiry days to assess the system's stability and effectiveness.
