Getting used to CAS for auction delivery

Sebi is clear that its recently introduced closing auction session (CAS) will be how closing prices are to be determined. Market participants unused to the new method should adapt to this new reality. The new process actually improves price discovery, lowers the risk of manipulation, and makes tracking by index and exchange-traded funds (ETFs) easier.

New York and London Stock Exchanges use CAS. So, why the pushback? It's largely coming from options traders accustomed to a specific style of closing trades. Sebi has dismissed concerns over volatility in CAS, and attributes initial friction to legacy algorithms and trader infrastructure built around the earlier process of determining closing prices through volume-weighted average prices. So, more of a case of old habits die hard.

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CAS provides prices that buyers and sellers actually agree upon. This makes executing large orders more efficient. It becomes difficult to influence prices through timed trades. The switch to a global norm like CAS has a bearing on passive investors by reducing tracking errors for index funds and ETFs. Sebi has adopted a phased rollout, starting with F&O stocks, and investor concerns should have been addressed by the time CAS is applied across the board. The regulator is open to feedback on fine-tuning the system, even as it emphasises that the new 3.15-3.35 pm trading mechanism is here to stay.

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Regulation would favour market structures that contribute to stability. Passive investments are a major stabilising force already in the Indian equity market, and their influence is growing. The derivatives segment is innately volatile, and Sebi has stepped in with measures to curb excessive speculation in options trading. Concerns over timing gaps for options traders while the cash market transitions into the auction phase will have to be addressed, though. The regulator will have to ensure volumes revive in closing trade, and prices don't stray too far from the continuous market. Which on the whole should be fine once the teething problems get sorted out.