The Sensex plunged more than 2,000 points within minutes during the CAS on Thursday, falling from around 77,200 at 3:17 pm to nearly 74,983 at 3:23 pm. The index subsequently recovered some of its losses but still ended the day 539 points, or 0.7%, lower at 76,934.
India changed how closing prices are determined from August 3. Instead of calculating the close using the volume-weighted average price (VWAP) during the final half-hour of trading, exchanges introduced a short Closing Auction Session, in which buy and sell orders are aggregated, and a single equilibrium price is discovered.
In a communication seeking attention to the August 27 movement, Somaiya asked whether the sharp intra-session swing pointed to a weakness in the CAS mechanism and called for an inquiry and action.
“On 27 August, during the last 12 minutes of trading at NSE/BSE, the Sensex crashed over 2,200 points and then recovered 2,000 points,” Somaiya said, asking whether “it is a weakness in the CAS system”.
He also asked whether the move could have been linked to any deliberate attempt to undermine the implementation of CAS, while calling on SEBI to examine the matter.
“SEBI must not take this CASUALLY,” he said. “If it is a weakness, then the officials who drafted it should owe an explanation. If it is done knowingly, is it healthy? Is it sabotage to stop implementation of CAS?””Shockingly, such things happened during the process of having a healthy system,” Somaiya said, adding that he wanted “not only inquiry but action also.”
Liquidity concerns after 3:15 pm
Along with his communication, Somaiya shared an observation that attributed the sharp movement partly to a lack of liquidity after 3:15 pm.
“The fundamental problem is also – there is no depth due to lack of liquidity after 3.15. All now trade before 3.15 pm. Any person who wants to purchase/sale after 3.15 pm doesn’t find liquidity and hence volatility,” the observation said.
The accompanying note proposed temporarily suspending CAS and reintroducing it after a redesign, citing several concerns around liquidity, price discovery and the interaction between the cash and derivatives markets.
Under the present framework, continuous trading in CAS securities ends at 3:15 p.m., after which the market moves into a separate auction. Equity derivatives, however, continue to trade until 3:40 p.m.
The note argues that this structure removes continuous-market liquidity before the auction begins. At 3:15 p.m., the continuous price-discovery mechanism is stopped and replaced by the auction order book, which the note describes as materially shallower.
The note also raises concerns about the fragmentation of closing liquidity between NSE and BSE. It points out that the same security can undergo separate closing auctions on the two exchanges, with separate order books, imbalances and potentially different equilibrium prices.
According to the note, on the first day of CAS, reported auction turnover was approximately Rs 1,276 crore on NSE compared with around Rs 10.8 crore on BSE, a difference of more than 100 times.
It argues that while the purpose of a closing auction is to concentrate liquidity, separate auctions on the two exchanges could instead fragment liquidity.
Questions over closing-price formation
The note also questions whether a relatively small amount of auction trading can provide a sufficiently robust price for a much larger pool of capital whose value is determined using the official closing price.
The closing price feeds into mutual fund NAVs, portfolio valuations, index closing levels, passive-fund tracking, mark-to-market valuations, derivative settlement economics and performance measurement, according to the note.
It therefore argues that the framework should consider minimum liquidity and market-quality conditions before an auction price automatically becomes the official close.
Another concern relates to the CAS’s ±3% auction band. The note argues that such a range could result in a significant change in the marked-to-market value of large companies even when the quantity actually matched in the auction represents only a small portion of the company’s outstanding shares.
For a company with a Rs 5 lakh crore market capitalisation, the note estimates that a 3% movement would change its marked market capitalisation by approximately Rs 15,000 crore.
It proposes a more conservative, dynamic collar that expands only when supported by substantial two-sided auction liquidity.
Cash and derivatives operate on different timelines
The note further highlights the different trading timelines for the cash and derivatives markets. While continuous cash trading for CAS securities stops at 3:15 p.m., equity derivatives continue trading beyond the auction.
According to the note, this means futures and options can continue to reflect changing information and expectations even after the underlying cash security has ceased continuous price discovery.
It argues that this weakens the normal cash-futures arbitrage mechanism at the point when the official closing benchmark is being established.
Concern over thin liquidity and expiry-day volatility
The note also argues that inadequate CAS liquidity could create a self-reinforcing cycle. If large institutions perceive liquidity in the auction as insufficient, they may execute before 3:15 p.m., further reducing auction liquidity. Lower liquidity could then increase price impact and execution uncertainty, discouraging participation further.
The note calls this a “negative liquidity flywheel”: low liquidity increases auction impact, weakens execution certainty, reduces participation and further drains liquidity.
“Participation is therefore partly an outcome of good market design, not merely a
prerequisite that can be assumed to emerge over time,” it said.
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