The Closing Auction Session (CAS) was introduced to make the market closing price more transparent and reduce the influence of large orders placed near the end of regular trading.
But after sharp price moves around the close, particularly on expiry days, the new system is now facing questions. The Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey has said that the regulator is not considering any changes to the CAS at present.
Pandey, speaking on the sidelines of the 30th Anniversary Celebration of NSE Clearing said, “We are not seeing any changes right now to CAS, and the system is running as it is. Participation will increase, and everyone, brokers, will enable it in their apps.”
The view from the regulator is that market participants need more time to understand the mechanism and participate more actively. But is low participation the real problem?
Market experts believe liquidity will be critical for the system to work as intended. They also point to the way futures and options behave around the closing price as an important reason for the sharp moves being seen on some expiry days.
Why was the Closing Auction Session introduced?
Chandan Taparia, Head – Derivatives and Technicals at Motilal Oswal Financial Services, said the basic purpose of CAS was to improve price discovery and make the closing rate less vulnerable to concentrated orders.
He explained, “The intention of CAS was to make the process transparent and bring about a better closing rate. This is because earlier while the market shut at 3.30 pm, between 3 to 3.30 the volume weighted average was used to decide the closing price. And, the volume burst used to be seen at 3 pm. People used to punch the big order because the calculation used to start at 3 pm.”
According to Taparia, traders would often wait for the 3 pm reference and then place large orders around that period.
“People used to wait for the 3 p.m. tick and that used to drive the expiry. The concern was if someone is putting so much order at three, then it can influence the closing price. So the aim was to have a better system for deciding the closing rate,” said Taparia.
CAS was introduced as a way to address this issue and bring India’s market-closing process closer to practices followed internationally.
He added, “So that’s why the CAS started and this practice is being followed by many international industries. So the aim was how we can keep the Indian market in sync with the international practice and the system.”
How does CAS work?
The system has different stages, and the distinction is particularly important for derivatives traders.
Taparia explained that regular futures and options trading continues beyond the normal equity-market closing time. The cash market moves through different phases before the final closing price is discovered.
He added, “Now what happens in CAS, after it started at 3:20, it continues till 3:35, participants are advised to put their orderfor buy and sell with a 3% range.”
In simple terms, the auction allows orders within a defined price range, and a price is eventually discovered where the maximum quantity can be matched.
Liquidity is the missing piece
Taparia believes the current participation in CAS is too low, particularly among retail traders.This low liquidity has been triggering the sharp divergence in the closing rate.
“Now very few retailers are participating in this because you have to put the order with the view that you might not get the trade. Why should people do other activities, right? And because of that, so many people are not putting orders in CAS. So liquidity is totally missing in the CAS and very few participants are putting the order and that influences the CAS because of their bid option system,” he added.
He pointed specifically to the Sensex and Bankex. According to Taparia, the Nifty has started adapting to the new system, with the initial size of expiry-day swings gradually reducing. “On day one, the swing was 220 points, then moved to 150 and 80 and 70 and now it’s 50-60 points. But it’s still happening with Sensex.”
Why are option traders affected specifically?
The new system has changed how traders manage their futures and options positions.
Taparia believes option writers have become more cautious because the expected decay in option premiums has not always happened near the close. He noted, “Earlier option writers were the key player in the derivatives market, they used to write to get the theta decay. Now premium decay is not happening in the market in the regular interval.”
Taparia added, “So the writers who are just doing the writing for the small benefits, they are reducing their positions. And again, we understand that buyers are not those who get the regular profit.”
This reduction in option-writer participation can reduce liquidity around the closing period and make price discovery more sensitive to smaller changes in bids and offers.
Why the 3% range matters
Taparia also raised concerns about the size of the permitted price range during the CAS window.
“The main question is until and unless we don’t get liquidity in the system, how the CAS system will be implemented well in the Indian market. And because of that, there is no meaning of your price, generally if you are looking at a chart. Suddenly in 15 minutes, the price goes up and down, that instead gives more volatility.”
He believes the system itself can work, but greater participation is needed.
Taparia also pointed out that awareness of the indicative price has improved in recent weeks, with exchanges and brokers making the information more visible
What should retail traders do?
Taparia’s advices caution, “Retail investors have to navigate CAS. Again, our clear advice is let the system digest this. Let the system digest this. We are waiting for liquidity to be in the system.”
At the same time, he does not believe CAS should necessarily be abandoned. Taparia said, “But I believe it is very good for the long term, because most of the global markets are utilising this, are using this practise. But again, liquidity is important.”
Volatility may be settling, but concerns remain
Anand James, Chief Market Strategist at Geojit Investments, offered a somewhat more measured view.
He said, “We are not sure if Thursday’s market movement is a one off, or if we might see more. But barring this event, CAS triggered volatility appears to have subsided if you look at the change in Nifty between 3:15 and 3:30, in the weeks after the first week of implementation of CAS.”
However, he pointed to a separate concern around options traders.
“With the present system, we have a bit of concern with option traders being in the dark even as the underlying stocks’ continuous trading stops at 3 15pm. Additionally, the 3% cap appears large for the short CAS window as it is capable of moving indices,” added James.
James also noted that every new market mechanism can create opportunities for traders who understand the rules faster than others.
“Some traders are quick to find pockets of opportunities with every new system, and at times that could indeed be a source of volatility, as other traders take time to embrace the changes,” he noted.
What happens next?
For now, SEBI has ruled out changing the CAS. That means traders and brokers are likely to spend more time adapting to the system rather than expecting an immediate regulatory reset.
The experts agree on one point – liquidity is central to the success of the new closing mechanism.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.