Will BSE shares recover from CAS hit? HDFC Securities rates stock 'add', sees revival in derivatives volumes

BSE could see a recovery in derivatives volumes after a sharp disruption caused by the introduction of the Closing Auction Session (CAS), believes HDFC Securities, which said that the regulatory impact appears to be largely behind the exchange.

The brokerage maintained an ADD rating on BSE and cut its target price marginally to Rs 3,850 from Rs 3,900. It also lowered its FY27 and FY28 earnings estimates by 4% and 2.3%, respectively, to account for weaker derivatives activity following the CAS rollout.

CAS, which went live on August 3, changed how closing prices are determined for stocks with futures and options contracts. Under the new system, continuous cash-market trading ends at 3:15 pm. Orders are then collected in an auction until 3:30 pm, followed by a random closing process, with the resulting equilibrium price becoming the official closing price. Earlier, the closing price was based on a 30-minute volume-weighted average price.


The change had a sharp impact on derivatives volumes. BSE's notional average daily turnover (ADTV) fell 17% quarter-on-quarter to about Rs 196 lakh crore in Q2FY27 so far, while premium ADTV declined 24% to Rs 225 billion. Industry-wide notional and premium ADTV fell 18% and 26%, respectively.

Also Read: One month of CAS: How 4 expiry days turned into a 6,000-point Sensex scare for investors

The impact was particularly severe in August. BSE's premium ADTV dropped about 26% month-on-month to Rs 18,700 crore, while industry premium ADTV fell around 19% to Rs 610 billion. BSE's notional ADTV fell to Rs 153.6 lakh crore in August from Rs 232.2 lakh crore in July, its lowest level in about a year.

HDFC Securities said the disruption was concentrated in derivatives and around expiry days rather than reflecting a broad decline in market participation. BSE's cash ADTV actually increased to about Rs 106 billion in August from Rs 9,900 crore in July.

The problem stems mainly from the mismatch between the cash-market closing auction and the derivatives trading window. While continuous cash trading stops at 3:15 pm, index options continue trading until 3:30 pm. This makes it difficult for option writers to hedge positions against a final settlement price that is still being determined through the auction.

The problem is more pronounced for BSE because around 75% of its options premium is generated on expiry and the day before expiry, compared with about 50% for its larger competitor, according to HDFC Securities. CAS turnover on BSE is also extremely small, at roughly 0.1% of cash ADTV, leaving the auction book relatively thin.

There are, however, early signs of improvement. BSE's premium ADTV rose 18% week-on-week to about Rs 22800 crore in the first week of September, though it remained around 23% below the Q1FY27 average of Rs 29600 crore. Its September premium market share also improved to around 35% in the first week, compared with 31% in August.

Despite the volume decline, BSE continued to gain market share. Its Q2FY27 notional market share stood at 48.7%, while premium market share increased to 32.6%, up from 48.6% and 31.5%, respectively, in Q1FY27.

HDFC Securities expects the regulator to make changes to the CAS framework rather than withdraw it. Possible measures include tighter auction price bands, allowing derivatives trading to overlap more closely with the auction window, restrictions on late order entry, or using a wider VWAP-based settlement mechanism.

(This article has been written by Podishetti Akash, who is not a SEBI-registered Research Analyst or an investment advisor. Podishetti Akash does not hold any financial interest in the above as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of the EconomicTimes Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclosures here)