- SEBI will keep the Closing Auction Session (CAS) despite rising criticism.
- The regulator is currently reviewing the derivatives settlement-price methodology.
- Traders may face higher volatility around expiry and market close.
India’s SEBI stands firm in its decision to retain the new Closing Auction Session (CAS). Despite increasing concerns surrounding the CAS, the regulator has no plans to roll it back. Instead, SEBI is looking at whether the way derivatives settlement prices are calculated needs to be changed. The focus is on whether CAS could make expiry-day trading more volatile.
What CAS Means for Intraday and Positional Traders
SEBI has reportedly confirmed that it will not withdraw the new Closing Auction Session (CAS). With the launch of CAS by SEBI, traders are required to give more attention to the final minutes of trading. For intraday traders, price can still move during the closing auction as buy and sell orders are matched to set the final price. This can lead to sudden price changes when there is a strong imbalance between buying and selling interest. Thus, the final minutes may become more unpredictable.
In the case of positional traders, the closing price may affect the daily value of their holdings and derivatives positions. Traders who take futures or options positions into the close may face additional risks.
Why SEBI Is Reviewing the Settlement-Price Method
Currently, SEBI is reviewing the derivatives settlement-price method. This is mainly because the CAS has raised concerns about how the closing auction price can affect futures and options on expiry days. If the prices move sharply during the auction, it could have a bigger impact on the final price that settles derivative positions.
However, it doesn’t mean that SEBI is changing its approach to CAS. The regulator will not remove the system. Instead, SEBI is reevaluating the settlement-price calculation to see if it needs to be adjusted to reduce the risk of unusual price swings and liquidity issues. The main objective is to improve price discovery while also making sure that the auction does not put unnecessary pressure on derivatives traders.
How CAS Could Change Expiry-Day Trading
Notably, SEBI’s CAS could make the final part of expiry days more important. As the closing price is determined through an auction rather than regular trading, a sudden imbalance between buy and sell orders could lead to sharp price movements. This becomes more crucial for traders holding options or futures positions. A change in closing price could directly affect the value of these positions.
This indicates that even with the reduction in market activity, the markets may still be volatile. Also, the lack of liquidity during the auction process can result in difficulty trading at the anticipated price level. Thus, it is necessary for investors to monitor the auction prices, the imbalance in orders, and the total exposure. This can no longer be done using the price seen before the CAS begins.
Who Is Affected by the Closing Auction Session?
It is worth noting that the CAS mainly affects stocks that have listed derivatives contracts. As these stocks enter the auction process at the end of the regular trading session, the closing prices are more relevant for traders with F&O positions.
This means that intraday traders, options and futures traders, and investors holding these stocks are most affected by the CAS. The effect is more noticeable on expiry days, as the stock’s closing price could then directly influence the settlement value of derivatives.
How Traders Can Manage Risk Around CAS
Traders need to be more careful with positions held near the close, as the closing auction is now important in the final part of the trading session. On expiry day, smaller position sizes could help limit the impact of sudden price fluctuations.
One important thing to note is that traders should not solely rely on the price seen before the auction. They should closely watch the indicative closing price, order activity, and option premiums. These indicators can give them a better idea of how the final price may come. Futures and options traders should have enough margin and avoid excessive exposure to help manage unexpected changes.
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Interestingly, if SEBI decides to change the settlement-price methodology, it will mainly affect derivatives positions and their settlement on expiry days. If the method is revised, it could reduce the influence of sudden moves during the closing auction and give traders a more stable reference price.
As of now, CAS appears to remain part of India’s market structure. At the same time, the settlement methodology remains under review. Traders will need to watch both the auction process and the potential changes SEBI may bring.
Disclaimer: The information presented in this article is for informational and educational purposes only. The article does not constitute financial advice or advice of any kind. Coin Edition is not responsible for any losses incurred as a result of the utilization of content, products, or services mentioned. Readers are advised to exercise caution before taking any action related to the company.
