Former BJP MP Kirit Somaiya has asked SEBI to probe the Sensex’s more than 2,000-point plunge and sharp recovery during the closing auction session on Aug. 27, raising questions over the design of the newly introduced mechanism.
Somaiya has also shared with SEBI a proposal he says he received that calls for the Closing Auction Session, or CAS, to be suspended, reviewed and redesigned before being reintroduced. The proposal flags concerns over liquidity, price discovery and the potential for sharp price moves when continuous cash-market trading ends.
The Sensex was trading around 77,200 shortly after 3:15 p.m. on Aug. 27 before falling more than 2,200 points within minutes during the auction. It then recovered much of the loss and closed 539 points, or 0.7%, lower at 76,934. The Nifty remained comparatively stable during the episode.
Somaiya has sought an investigation into what triggered the sharp movement and whether there was any attempt to manipulate prices or undermine CAS. He has also sought scrutiny of the framework and its implementation.
The proposal attached to his letter argues that CAS may need to be reviewed because liquidity can fall sharply once continuous trading ends at 3:15 p.m. Under the new system, eligible stocks enter an auction to determine their closing price, while equity derivatives continue trading until 3:40 p.m. This can create a gap between cash-market price discovery and derivatives trading, according to the proposal.
It also raises concerns about separate closing auctions on NSE and BSE and whether relatively low trading volumes during the auction can produce a reliable closing price. The closing price has wider implications because it feeds into index levels, mutual fund NAVs, portfolio valuations and derivatives settlement.
The proposal further questions the price band applicable during the auction and calls for a more cautious approach to the mechanism until its impact on liquidity and price discovery is assessed.
CAS was introduced on Aug. 3 to replace the earlier method of determining closing prices using the volume-weighted average price during the final half-hour of trading. The new process is intended to improve price discovery and align Indian markets more closely with global practices.
The Aug. 27 episode is not the first incident to put CAS under scrutiny. SEBI has already taken action over trades during the auction on Aug. 13.
In an interim order, the regulator barred Copthall Mauritius Investment, a JPMorgan-owned entity, and Mansi Share and Stock Broking from accessing the securities market over alleged manipulative trading during the Sensex closing auction. SEBI alleged that Copthall placed aggressive buy orders in Sensex constituents, while Mansi placed large sell orders in eight stocks and subsequently cancelled almost all of them. The regulator ordered the impounding of Rs.3.68 crore in alleged wrongful gains.
SEBI said it had not found prima facie evidence that the two entities acted in concert.
Somaiya’s latest letter puts the spotlight back on whether the Aug. 27 volatility was a result of thin liquidity and the mechanics of CAS, or whether it points to broader vulnerabilities in the new closing-price framework.
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