Mumbai: Former BJP MP Kirit Somaiya has written to Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey, raising concerns over the newly introduced Closing Auction Session (CAS) mechanism after the Sensex witnessed an unusually sharp fall and recovery during the final minutes of trading August 27.
In his letter, Somaiya sought the regulator’s attention to the market movement between 3.20 p.m. and 3.30 p.m. August 27, when the Sensex reportedly crashed by more than 2,200 points before recovering around 2,000 points.
The sharp movement occurred during the first monthly derivatives expiry since the introduction of CAS and has triggered wider concerns over liquidity and price discovery.
Somaiya questioned whether the unusual volatility pointed to a weakness in the CAS framework and urged SEBI not to take the episode “casually”.
He said that if the movement was the result of a weakness in the system, officials involved in designing the framework should explain what went wrong.
He also raised questions over whether the sharp market movement could have been deliberate and whether there was any attempt to undermine or sabotage the implementation of CAS. Somaiya called for not just an inquiry but also appropriate action based on its findings.
The former MP also highlighted liquidity concerns in the post-3.15 p.m. period. Citing an observation received from a market observer, he said the lack of sufficient liquidity after 3.15 p.m. could contribute to heightened volatility because investors looking to buy or sell during that period may not find adequate depth in the market.
In a separate proposal attached to the letter, Somaiya called for the temporary suspension of CAS and its reintroduction after a redesign based on practical considerations.
He argued that the present architecture removes continuous trading liquidity at precisely the time when liquidity could be important.
Under the current framework, continuous trading in CAS securities ends at 3.15 p.m., after which the market moves into a separate closing auction, while equity derivatives continue trading until 3.40 p.m.
According to Somaiya’s proposal, the transition effectively switches off a deep continuous market and expects a relatively shallow auction to recreate sufficient liquidity for determining the closing price.
He argued that a closing auction should ideally build on existing market liquidity rather than first removing continuous liquidity and then attempting to recreate it through an auction.
Somaiya also raised concerns over the fragmentation of closing liquidity between the NSE and BSE. He pointed out that the same security can currently undergo separate closing auctions on the two exchanges, with separate order books, imbalances and potentially different equilibrium prices.
