Sebi warns against attempts to manipulate closing auction
Securities and Exchange Board of India Chairman Tuhin Kanta Pandey has warned market participants against attempts to manipulate the newly introduced Closing Auction Session, saying the regulator has stronger surveillance capabilities under the mechanism and will act sternly against misconduct.
Pandey said on Wednesday that any attempt to undermine or “defame” the Closing Auction Session, or CAS, through manipulation would attract regulatory action. He also reinforced Sebi’s position that the mechanism, introduced on August 3, is here to stay despite concerns raised by brokers and other market participants during its opening weeks.
The warning comes as Sebi and stock exchanges work to improve liquidity and price discovery during the 20-minute auction that determines closing prices for eligible shares. The regulator has asked brokers to facilitate order placement during the five-minute transition between 3.15 pm and 3.20 pm from September, a change aimed at increasing participation before orders are matched.
CAS operates between 3.15 pm and 3.35 pm on trading days. During its initial phase, it applies to shares in the equity cash market on which derivative contracts are available. Other securities continue to use the earlier method for calculating closing prices.
The previous framework determined the closing price using the volume-weighted average price of trades conducted during the last 30 minutes of continuous trading. Under CAS, buy and sell orders are brought together in a separate auction, with the closing price established around the level at which the maximum executable quantity can be matched.
Pandey said Sebi’s ability to identify manipulation is greater under the auction framework than under the volume-weighted average system. The regulator views the mechanism as an important market-structure reform designed to make closing-price formation more transparent and bring domestic practices closer to those followed by major international markets.
The rollout initially produced sharp movements in benchmark indices and prompted concerns over thin liquidity during the auction. The Nifty 50 and BSE Sensex experienced unusual closing-stage divergences during some sessions, drawing attention from traders, brokers and institutional investors.
Market participants have linked some of the early volatility to limited depth in the securities lending and borrowing market. Short-selling constraints can make it difficult for participants to respond quickly when auction prices diverge from levels prevailing during continuous trading.
Sebi has maintained that it has not detected manipulation behind the unusual price movements observed since CAS began. Pandey earlier said cautious participation during the initial phase contributed to some of the differences in closing levels and argued that greater familiarity with the mechanism should improve liquidity.
Institutional participation has already strengthened. Mutual funds accounted for only about 5-6 per cent of activity during the first day of the closing auction, but their share subsequently climbed to roughly 20-25 per cent. Greater participation from institutions, arbitrage desks and other large market players is expected to narrow price discrepancies and deepen the auction order book.
Stock exchanges have also introduced adjustments intended to make the system easier for traders to follow. Indicative index prices are now displayed during the closing auction, giving participants greater visibility into the potential effect of individual share prices on benchmark indices.
Shorter-tenure contracts have also been introduced in the securities lending and borrowing segment, addressing concerns that the earlier structure provided insufficient flexibility for participants seeking to hedge or arbitrage positions around the closing auction.
Sebi has indicated that feedback from brokers and investors remains under examination even as it rules out abandoning CAS. Pandey said earlier this week that the regulator was analysing issues raised during implementation and would consider changes where required to make the mechanism function more efficiently.
The auction is particularly significant for passive investment products such as exchange-traded funds and index funds. Closing prices influence index calculations, portfolio valuations and the execution of large institutional orders. Sebi expects a deeper closing auction to reduce tracking errors and provide investors with a more representative end-of-day price.
Closing auctions are already standard features at several major international exchanges, where substantial institutional trading takes place around the market close. Sebi designed the domestic framework around the principle of establishing a single equilibrium price through the matching of aggregate supply and demand rather than relying on an average of earlier trades.
Pandey said on Wednesday that any attempt to undermine or “defame” the Closing Auction Session, or CAS, through manipulation would attract regulatory action. He also reinforced Sebi’s position that the mechanism, introduced on August 3, is here to stay despite concerns raised by brokers and other market participants during its opening weeks.
The warning comes as Sebi and stock exchanges work to improve liquidity and price discovery during the 20-minute auction that determines closing prices for eligible shares. The regulator has asked brokers to facilitate order placement during the five-minute transition between 3.15 pm and 3.20 pm from September, a change aimed at increasing participation before orders are matched.
CAS operates between 3.15 pm and 3.35 pm on trading days. During its initial phase, it applies to shares in the equity cash market on which derivative contracts are available. Other securities continue to use the earlier method for calculating closing prices.
The previous framework determined the closing price using the volume-weighted average price of trades conducted during the last 30 minutes of continuous trading. Under CAS, buy and sell orders are brought together in a separate auction, with the closing price established around the level at which the maximum executable quantity can be matched.
Pandey said Sebi’s ability to identify manipulation is greater under the auction framework than under the volume-weighted average system. The regulator views the mechanism as an important market-structure reform designed to make closing-price formation more transparent and bring domestic practices closer to those followed by major international markets.
The rollout initially produced sharp movements in benchmark indices and prompted concerns over thin liquidity during the auction. The Nifty 50 and BSE Sensex experienced unusual closing-stage divergences during some sessions, drawing attention from traders, brokers and institutional investors.
Market participants have linked some of the early volatility to limited depth in the securities lending and borrowing market. Short-selling constraints can make it difficult for participants to respond quickly when auction prices diverge from levels prevailing during continuous trading.
Sebi has maintained that it has not detected manipulation behind the unusual price movements observed since CAS began. Pandey earlier said cautious participation during the initial phase contributed to some of the differences in closing levels and argued that greater familiarity with the mechanism should improve liquidity.
Institutional participation has already strengthened. Mutual funds accounted for only about 5-6 per cent of activity during the first day of the closing auction, but their share subsequently climbed to roughly 20-25 per cent. Greater participation from institutions, arbitrage desks and other large market players is expected to narrow price discrepancies and deepen the auction order book.
Stock exchanges have also introduced adjustments intended to make the system easier for traders to follow. Indicative index prices are now displayed during the closing auction, giving participants greater visibility into the potential effect of individual share prices on benchmark indices.
Shorter-tenure contracts have also been introduced in the securities lending and borrowing segment, addressing concerns that the earlier structure provided insufficient flexibility for participants seeking to hedge or arbitrage positions around the closing auction.
Sebi has indicated that feedback from brokers and investors remains under examination even as it rules out abandoning CAS. Pandey said earlier this week that the regulator was analysing issues raised during implementation and would consider changes where required to make the mechanism function more efficiently.
The auction is particularly significant for passive investment products such as exchange-traded funds and index funds. Closing prices influence index calculations, portfolio valuations and the execution of large institutional orders. Sebi expects a deeper closing auction to reduce tracking errors and provide investors with a more representative end-of-day price.
Closing auctions are already standard features at several major international exchanges, where substantial institutional trading takes place around the market close. Sebi designed the domestic framework around the principle of establishing a single equilibrium price through the matching of aggregate supply and demand rather than relying on an average of earlier trades.