CAS sparks trader backlash as losses mount, Sebi holds firm

Calls for changes to the mechanism or, even a temporary rollback, have gathered pace on social media, prompting the Securities and Exchange Board of India and exchanges to convene a meeting with top brokers even as the authorities defended the framework.

The regulator is believed to have told brokers that it has no plans to change the CAS for now and urged them to encourage more traders to participate in the mechanism. An email sent to Sebi went unanswered till the time of going to print

At the centre of the controversy is the regulator’s decision to overhaul the way closing prices of 200-odd stocks in the futures and options (F&O) segment are determined, which traders say has caused unusually wide divergences between Sensex and Nifty and futures and options trades going awry.

“The biggest problem under the CAS is that traders are unable to understand what the closing prices will be because there is a lot of randomness in the system,” said Piyush Chaudhry, founder of Mumbai-based Wave Analytics.

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Professional traders use factors such as order flows, liquidity, derivatives positions and historical trading patterns to estimate price directions-key to successful trading. Sharp deviations from those expectations can cause trading strategies to misfire, resulting in unexpected gains or losses.
Options traders have taken the biggest hit in the closing auction system. For traders like Aakanksha Gupta, the closing auction mechanism has put her in a blind spot as she is unable to assess where the Nifty is likely to close.”As an options seller, I rely on the live Nifty spot level to execute trades throughout the day. Since CAS was introduced, cash market trading ends at 3.15 pm , but the F&O eligible stocks continue to trade,” said Mumbai-based Gupta, a Sebi-registered research analyst. “We build strategies around the prevailing spot level, only to find the index repricing sharply when trading resumes, turning profitable positions into losses.

Both indices have witnessed rollercoaster rides in the past three days. On Wednesday, the Sensex was down 0.2% and the Nifty had fallen 0.5% at their intraday lows. At close, the Sensex ended 0.19% higher, while the Nifty closed almost flat.

“Over the past two days, we’ve seen a significant gap between the reference price during the CAS and the final indicative closing price, because large orders can influence the indicative price,” said Aditya Pachwaria, founder, Fintoric Capital.

Wild Swings

Shikha Pruthi Gupta, a Faridabad, NCR-based full-time trader, said a profitable trade at 3.15 pm can unexpectedly turn into a loss because of the lack of visibility into where the index will finally settle.

One key criticism voiced by traders is the 3% price band within which the auction price is generally allowed to move, measured on the basis of the stock’s average traded price between 3.00 and 3.15 pm.

“How can you have a +/- 3% range for stock prices in the auction process; that itself is a random number and has no connection to what the market’s behaviour was for the day,” said Chaudhry. “This methodology is highly questionable and has no statistical basis.”

Algorithmic trading has been among the biggest casualties of the new mechanism, with professional traders saying their models have struggled to anticipate the sharp and unexpected price moves seen over the past three days. This is because many algorithms were designed around historical closing price patterns rather than an auction-driven market close.

The new closing auction process lasts about 20 minutes, from 3.15 pm to around 3.35 pm. During this period, the exchange first collects buy and sell orders and then matches them to determine a single official closing price for the stock. Under the previous system, a stock’s closing price is based on the average price of trades done in the last 30 minutes, between 3 pm and 3.30 pm.

The difficulty in predicting closing prices has disrupted traders’ risk-management systems, prompting many, such as Pachwaria, Gupta and Chaudhry, to stay on the sidelines. Since many of them trade with leverage, unexpected moves near the close can magnify losses, making it harder to manage risk.

“Many traders, including me, are observing rather than trading because even algos cannot work in this environment,” said Chaudhry.