SEBI's closing auction mechanism needs a rethink, market experts say

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.

Rohit Srivastava, Founder and Strategist at Indiacharts.com and Strike Money, said the problem is not SEBI's intent but the pace of implementation. "I don't think this is an issue of intent," he said, adding that most retail investors and traders using broker terminals, online apps, or desktop platforms are not yet equipped to place the specific order types the auction window requires.

He suggested SEBI ask brokers for a clear implementation timeline, and roll back to the older mechanism until all trading systems are ready. "You come up with a timeline for all the brokers to implement these apps, and for that time period, you step back," Srivastava said.

Chandan Taparia, Head of Derivatives and Technicals at Motilal Oswal Financial Services' wealth management arm, said the CAS has already changed how institutions trade around expiry. He said 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 and shift toward strategies such as long strangles instead.

What CAS is and why it was introduced

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. Under the new system, orders can be placed within a 3% band of a reference price, which is calculated from the volume-weighted average price between 3:00 pm and 3:15 pm.

The mechanism has now been in place for four Thursdays — August 6, 13, 20 and 27 — with the sharpest volatility on expiry days, when derivative positions must be settled against the closing price.

Taparia proposed narrowing that band. "If the regulator reduces that price band of 3% to 1-1.5%, then there will be chances of comparatively less volatile move in the last 15 minutes in the market," he said. He also 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.

Rajesh Baheti, of Crosseas Capital, was more critical in comments aired during the discussion. He warned that concentrating same-day options trading activity into the last 15 minutes risks turning it into speculation rather than genuine trading. He also flagged a separate issue: traders placing orders early in the window and then withdrawing or modifying them just before close, which he said adds to the volatility. He suggested SEBI consider a penalty for last-minute order withdrawals or modifications, and floated allowing a portion of cash market volume to be directly linked to the F&O settlement process.

SEBI holds its ground

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.

Srivastava said the wider issue extends beyond expiry days. He explained that anyone using systematic, chart-based trading strategies depends on a stable closing price every day, not just on expiry. "Suddenly, the closing price has lost meaning. I need a new system," he said, describing how funds running delta-hedged derivative books need to adjust exposure daily based on factors like delta and theta, not only around expiry.

He drew a comparison to market gaps he witnessed while running a hedge book in 2006, when repeated overnight drops made it difficult to adjust positions smoothly and led to mounting losses — a dynamic he said is now playing out within a single 15-minute window instead of overnight.

Advice for retail traders

Responding to a viewer query from Patna about how to time exit orders under the new system, Taparia advised retail option writers to close positions before 3:15 pm rather than carry them into the auction window, or shift to spread strategies in the next expiry. For those keeping positions open, he suggested maintaining a buffer of 150-200 points on Nifty strikes and 300-400 points on Sensex strikes to reduce exposure to the auction-window swings, at least until liquidity in the new system improves.

For the full interview, watch the accompanying video

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