Sebi warns traders against manipulating closing auction

India’s markets regulator has warned traders against trying to manipulate the country’s new closing auction system as it works with brokers and exchanges to address liquidity problems that have caused sharp swings near the end of trading.

Securities and Exchange Board of India (Sebi) chairman Tuhin Kanta Pandey said Wednesday, 19 August, that manipulation would be easier to detect under the Closing Auction Session, or CAS, than under the volume-weighted average price system it replaced.

Pandey was speaking at the FICCI Capital Markets Conference in Mumbai.

The warning comes little more than two weeks after CAS went live on 3 August. Its introduction has drawn complaints from brokers and traders after some sessions produced abrupt moves in the Nifty 50 and Sensex close to the end of the day.

Pandey has ruled out scrapping the system. Earlier this week, he said CAS was “here to stay,” while adding that Sebi was looking at market feedback and operational issues.

Sebi introduced CAS through a circular on 16 January. For now, it applies in the cash market to stocks that have derivatives contracts.

The change affects how the official closing price of those stocks is set.

Previously, the closing price was based on the volume-weighted average price during the final 30 minutes of normal trading. Under CAS, eligible stocks move into a separate auction between 3:15 pm and 3:35 pm.

The first five minutes are used to calculate a reference price from trades between 3 pm and 3:15 pm. The auction then takes orders before matching them.

The final price is set at the level where the largest volume of shares can be traded. If more than one price meets that test, the system chooses the one that leaves the smallest imbalance between unmatched buy and sell orders. Auction prices can move within a 3% band on either side of the reference price.

Closing auctions are widely used in international markets because they allow buyers and sellers to meet at a single price at the end of the session. The closing price matters well beyond the individual stock. It is used in index calculations, portfolio valuations and by funds that track benchmarks.

CAS, however, has had a bumpy start in India.

The new process contributed to unusually sharp moves in the Nifty 50 and Sensex during its first few sessions. Market participants pointed to thin liquidity and shortcomings in India’s securities lending and borrowing market as contributing factors.

The exchanges have already made adjustments. They have begun showing indicative index values during CAS and introduced shorter-duration securities lending contracts in an effort to make it easier for traders to borrow stock when needed.

Sebi has also asked brokers to accept after-market orders during the 3:15 pm to 3:20 pm transition period. That would allow orders to be lined up before auction order entry begins.

For all the volatility around some early closes, Sebi has said it has not found evidence of manipulation.

Pandey said on 12 August that cautious participation in a new trading system was a more likely reason for some of the differences seen between index moves and underlying stocks.

His latest comments were aimed at making clear that this should not be read as an invitation to test the system.