In in the present day’s Finshots, we discuss in regards to the downsides of CAS (Closing Public sale Session) and discover whether or not Indian inventory markets can maintain manipulation at bay.
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With that out of the way in which, let’s dive into in the present day’s story.
The Story
Precisely two weeks in the past, when the CAS (Closing Public sale Session) mechanism kicked off within the inventory market, we told you that we had already written about it a yr in the past, so we’d skip one other story on it.
However perhaps future had different plans. As a result of simply the day earlier than yesterday, market regulator SEBI pulled up two companies, Copthall Mauritius Funding Ltd. and Mansi Share and Inventory Broking, for allegedly manipulating the SENSEX’s closing value through the CAS, and seemingly minting ₹3.68 crore from it.
So let’s perceive what occurred and whether or not CAS actually is the villain everybody thinks it’s.
Till July this yr, a inventory’s official closing value was calculated utilizing the typical value (particularly the Quantity Weighted Common Worth, or VWAP) of all trades within the final half-hour of the buying and selling day.
However beginning this month, SEBI changed that system with the CAS. Right here, common buying and selling stops at 3:15 PM for shares with Futures and Choices (F&O) contracts. Then a separate 20-minute public sale runs till 3:35 PM, very similar to the pre-open session used to set opening costs.
Throughout these 20 minutes, merchants get particular five-minute home windows to put or modify orders. The alternate then swimming pools all of the purchase and promote orders and finds an “equilibrium value” or just, the worth at which the utmost variety of shares can change palms.
You’ll be able to learn how this works in additional element here and here. And that turns into the official closing value, which is then used to calculate index ranges, settle F&O contracts and decide mutual fund NAVs.
That is what paved the way in which for the alleged manipulation final week. Final Thursday (August thirteenth, 2026) was the weekly expiry of SENSEX choices. So the CAS closing degree that afternoon instantly decided how a lot merchants made or misplaced on these expiring contracts.
And since Copthall and Mansi held choices positions that will acquire if the SENSEX moved of their favour, SEBI alleges that they tried to affect that closing degree.
So, how did they do it?
Let’s begin with Copthall, a Mauritius-based international portfolio investor linked to JPMorgan Chase.
Through the first two seconds of the CAS, it positioned 32 massive purchase orders throughout all 30 SENSEX shares, value about ₹66 crore. And these weren’t atypical purchase orders. They have been positioned virtually precisely on the most value allowed beneath CAS.
What’s much more fascinating in addition to suspicious is that Copthall alone accounted for 99.9% of the whole buy-order worth throughout these two seconds. That was sufficient to push the indicative SENSEX degree up by 362 factors virtually immediately.
And Copthall apparently did this not a few times, however thrice. Through the second and third spikes, it once more flooded the market with aggressive purchase orders accounting for 96% and 85% of all purchase orders respectively. Then, as soon as the worth had moved up, it cancelled its newest batch of purchase orders.
When you’re questioning why, effectively, Copthall held a mixture of possibility contracts that will profit if the SENSEX closed larger. So SEBI believes it used aggressive shopping for within the underlying SENSEX shares to push the index up and enhance the earnings it produced from these choices.
Mansi, in the meantime, performed the alternative sport. It had purchased SENSEX choices that will profit if the index fell. So between 3:21 PM and three:25 PM, it positioned promote orders value about ₹145 crore throughout eight SENSEX shares, typically at costs 1.5–3% under their reference costs (the worth utilized by the alternate as the start line for calculating the indicative closing value through the public sale). This stored the SENSEX degree artificially decrease for about 5 minutes. Then, inside simply three seconds, Mansi cancelled virtually all these orders, pulling the index down by practically 233 factors.
That apparently helped Mansi exit its put choices at a revenue as an alternative of letting them expire nugatory.
Which tells you that each gamers appear to have exploited the CAS to learn their very own possibility positions.
However wait. Wasn’t CAS launched to stop exactly this sort of manipulation? So how did this occur? And does it imply CAS itself is a foul thought?
Nicely, every thing has its downsides. And CAS isn’t any exception.
As you’ve seen, CAS swimming pools all orders right into a single 15–20 minute window, with far fewer members than a full buying and selling session, and makes use of them to seek out one “equilibrium” value. Not like the previous VWAP methodology, which averaged hundreds of trades over half-hour, a name public sale’s single closing value will be closely influenced by only one or two massive members if real competing orders are scarce.
That’s precisely what SEBI discovered within the Copthall case, the place one entity accounted for 85–99% of the buy-order worth through the spikes that moved the SENSEX.
There’s one other downside too. CAS at the moment permits merchants to cancel orders virtually till the top of the order-entry interval. So a dealer can flood the order e book with massive purchase or promote orders to push the indicative value up or down, after which cancel most of them as soon as they get the result they need, with out ever meaning to commerce. This is named spoof and pull.
However there are methods to make CAS tougher to control.
As an example, SEBI may have a look at just a few international exchanges which have safeguards designed to stop precisely this sort of behaviour.
The NYSE, for instance, has a freeze ten minutes before the close. After that, orders can now not be cancelled or modified, apart from real keying errors verified by alternate employees. This instantly shuts the loophole that Copthall and Mansi are accused of exploiting.
Thailand’s SET has a barely totally different method. It randomly picks a closing time between 4:35 and 4:40 PM, making it a lot tougher for merchants to time orders across the actual shut.
Hong Kong does something similar. Its closing public sale ends at an unpredictable time between 4:08 and 4:10 PM, whereas cancellations are prohibited after 4:06 PM.
See one thing widespread right here?
Each one in all these exchanges both has some type of a no-cancellation window or a shock closing time inside a selected window. The thought is that merchants shouldn’t know precisely when the public sale will finish or have the ability to pull off their orders on the final second and sport the closing value.
Now, it’s not as if India doesn’t have comparable safeguards. Proper now, the order-entry interval can shut randomly at any level over the past two minutes earlier than 3:30 PM. And between 3:25 PM and three:30 PM, some orders can’t be cancelled or modified.
However discover we mentioned “some orders” as a result of solely market orders are locked in. Restrict orders can nonetheless be modified or cancelled.
So maybe the answer is to increase the no-cancellation rule to restrict orders too, not less than through the last couple of minutes earlier than the random cutoff.
The one caveat right here, or somewhat, the explanation this isn’t prolonged to restrict orders as effectively, is that restrict orders play an necessary function in value discovery. Not like a market order that claims, “I’ll commerce at no matter value the public sale finds.”, a restrict order says, “I’ll commerce, however solely round this value.”
Through the public sale, merchants can maintain adjusting their restrict orders as they see the indicative value and the hole between patrons and sellers change. That helps the public sale steadily determine on a good value the place the utmost variety of shares can truly commerce.
But when these orders are frozen too early, everybody should submit a value after which sit again and wait. That would make the ultimate value much less correct.
There’s another excuse SEBI could also be hesitant to increase the no-cancellation rule to restrict orders. And that’s CAS already has a participation downside. Early information in keeping with Bernstein means that buying and selling within the last window at the moment accounts for just 1.6–2.3% of daily NSE turnover, in contrast with 10% beneath the previous VWAP system. So participation has fallen sharply since CAS started. A no-cancellation rule for restrict orders may probably make that worse.
So yeah, in the long run you possibly can say that SEBI truly has an answer that it may implement. However it’s most likely simply ready for the proper time.
Till then…
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