SEBI shouldn’t have gone in for CAS

Source: The post “SEBI shouldn’t have gone in for CAS” has been created based on “SEBI shouldn’t have gone in for CAS” published in “Business Line” on 01st September 2026.

UPSC Syllabus: GS-3-Economy

Context: The Securities and Exchange Board of India (SEBI) introduced the Closing Auction Session (CAS) from August 3, 2026, replacing the earlier VWAP-based mechanism for determining the closing price of stock derivatives. However, its initial experience has raised concerns about its suitability for India’s retail-heavy and high-frequency derivatives market.

Issues associated with CAS

1. Increased market volatility: On the first monthly expiry after CAS, Sensex fell nearly 2,200 points in five minutes and recovered around 2,000 points within seven minutes, creating unprecedented price swings.
2. Cash-derivatives asymmetry: The cash market awaits its final price while the derivatives market remains open till 3:40 pm, creating opportunities for sophisticated traders.
3. Retail investor vulnerability: Despite regulatory measures, 87.7% of individual derivatives traders continued to lose money, showing their vulnerability against technologically sophisticated participants.
4. Possibility of price manipulation: Unlike VWAP, which reflects continuous transactions over 30 minutes, an auction can allow a large order imbalance to significantly influence the equilibrium price.
5. Technological asymmetry: Professional proprietary traders, algorithmic traders and FPIs possess greater technological capabilities than retail participants.
6. Inadequate stress-testing: CAS appears to have been transplanted from mature markets such as the NYSE and Nasdaq without adequately considering India’s different market structure.
7. Regulatory concerns: The earlier Jane Street case and subsequent action against Copthall Mauritius and Mansi Stock & Share Brokerage demonstrate the risks of sophisticated derivatives strategies interacting with relatively thin underlying markets.

Way Forward

1. SEBI should immediately review and stress-test CAS under extreme market conditions.
2. The mechanism should be aligned with India’s retail-heavy, high-frequency and speculative derivatives structure.
3. Stronger surveillance should be established to detect algorithmic manipulation and abnormal order imbalances.
4. Regulatory reforms should prioritise market stability and investor protection rather than merely copying global practices.

Conclusion: Global best practices cannot be mechanically transplanted into markets with different structures. CAS should therefore be reassessed and modified or reversed if necessary, after rigorous empirical testing and consultation with market participants.

Question: The introduction of the Closing Auction Session (CAS) in India’s derivatives market has raised concerns regarding market stability, retail investor protection and regulatory suitability. Discuss the issues associated with CAS and suggest the way forward.

Source: Business Line