We imported the auction, but we left out the brakes
India’s Closing Auction Session (CAS) was introduced to improve price discovery, but recent sharp swings have exposed gaps in its safeguards. Jimeet Modi argues that allowing order cancellations until the auction ends can leave markets vulnerable to manipulation, calling for stronger controls, deeper liquidity and better protection around index-level settlement prices.
On August 3, India implemented a new method to determine the closing price of the Sensex, introducing the Closing Auction Session (CAS). Instead of using the usual method of calculating the closing price from the average price during the last half-hour of trading (VWAP), this new system aggregates buy and sell orders during a short session and discovers a single equilibrium price.
While this concept is not new, as London, New York, and Hong Kong have been using closing auctions for years, India's experience highlights the critical importance of safeguards surrounding the auction. Just three days after the implementation, on August 13, the indicative price of the Sensex spiked within seconds and saw two more sharp movements.
SEBI later found prima facie evidence of manipulation and impounded the alleged gains. The crucial issue, however, lies in the design of the market that allowed such manipulation to occur. Contrary to mature markets, India's current auction permits limit orders to be cancelled right up to the end of the session, which is a significant vulnerability.
Other markets have implemented additional protections, such as restricting cancellations in the final minutes and operating order-freeze mechanisms. The recent episode on August 27 further exemplifies the risks associated with this design flaw. Despite the Sensex trading comfortably above 77,100 throughout most of the day, the indicative price plummeted to around 74,983—nearly 3% below the level at which continuous trading had left the market—during the final 15-minute auction window.
This manipulation had significant consequences, as stop-losses and derivatives positions were affected, and index funds had to absorb the difference. Participants had no choice but to deal with the distorted final price. While the closing auction may not be entirely incorrect, the market design needs significant improvements to prevent exploitation of its mechanics.
Mature markets have already built friction into the final window of the auction, while India has yet to fully implement the necessary safeguards. The answer is not to abandon the Closing Auction Session but to strengthen the overall market infrastructure, deepen market-making participation, and reassess the effectiveness of stock-level price bands in protecting index-level settlements.
Written by urgent.news from The Economic Times - Top News's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
