SEBI Examines CAS Trades For Possible Manipulation On First Two Days

The Securities and Exchange Board of India (SEBI) is closely examining trades executed during the Closing Auction Session (CAS) on August 3 and 4 to check for possible manipulation, according to a report by Moneycontrol.

SEBI has sought trading data from stock exchanges for the first two days of the new closing mechanism. The exchanges have provided the requested data, and the regulator is now analysing the trades to determine whether the wider gap between pre-CAS and post-CAS index levels was normal or whether some trades were placed to influence the closing price, the report added.

The scrutiny follows concerns raised by market participants over the sharp difference between index levels before the CAS and levels recorded after the auction session on the first two trading days.

On August 3, the first day of CAS, the Nifty was around 24,573 at 3:28 pm before moving to around 24,774 by 3:30 pm, a jump of about 201 points in the final minutes. On August 4, the index was around 24,463 at 3 pm and moved to approximately 24,615 by 3:15 pm, a rise of about 152 points.

Point to note: The CAS is a 15-minute auction held from 3:15 pm to 3:30 pm to determine the official closing price of eligible securities. During this window, buy and sell orders are collected and matched at an equilibrium price that maximises traded volume.

The mechanism was introduced on August 3 to improve price discovery and make closing prices more representative of actual market activity, while reducing the scope for manipulation. It also aims to align India's market structure with global practices followed in other major markets.

Liquidity Concerns Flagged

Market participants reportedly said weak liquidity during the CAS period could raise the risk of manipulation, particularly in indices or stocks where cash-market turnover is relatively low. They explained that a large fund or a group of operators could invest a significant amount in a passive index fund while simultaneously taking positions on the same index, anticipating that passive buying would push the index higher. Such a strategy, they said, could potentially be used to influence index levels during the auction period.

"Such possibilities are higher on expiry days for indices where cash-market turnover is low, say ₹100-200 crore during the CAS period," a market participant told Moneycontrol.

However, market participants said establishing that such trades were manipulative could be difficult. They noted that the regulator would need to prove there was an intention to influence the index or closing price, and not merely that certain trades had an effect on it.

"Simply identifying trades that had an impact on the index may not be enough. It has to be established that there was a coordinated move by parties to manipulate the index," another market participant told the publication.

SEBI Steps Up Monitoring

To address the risk of manipulation arising from weak participation, SEBI is closely monitoring trading activity during the CAS window. The regulator has also asked brokers to increase retail investor participation and to display indicative prices prominently on their trading applications, so that investors are better informed before placing orders during the session.

SEBI's probe of the trades is aimed at ensuring orderly trade in the market and not at discouraging genuine traders. A strict monitoring mechanism for the CAS period was reportedly envisaged even before the mechanism was implemented, the report further said.