SEBI could have been better prepared for closing auction, says UK Sinha
The closing auction session was well-intentioned by the regulator and will stabilise eventually, says former SEBI Chairman.
Former SEBI chairman UK Sinha expressed concerns about the market regulator's preparation for the closing auction session (CAS) mechanism, which was introduced on August 3. Sinha stated that better consultation and beta testing were necessary, but he remains confident that the system will stabilize. The CAS alters the way official closing prices are determined for futures and options (F&O) stocks, with continuous trading ending at 3.15 pm and an auction process taking place afterward.
The regulator issued two consultation papers before finalizing the framework in January, but only conducted a mock trading session two days before the mechanism went live. Since implementation, the CAS has faced criticism over sharp price swings during the auction period, with market participants raising concerns about liquidity and suggesting a rollback of the framework.
Experts noted that similar risks existed under the earlier VWAP methodology, but the auction mechanism makes manipulation easier to detect. Sinha also highlighted that an active securities lending and borrowing mechanism could have facilitated a smoother transition. Recently, SEBI took action against entities for alleged manipulation in the cash market during the auction to capitalize on derivatives expiry positions.
The incident has also drawn attention to the disparity between the size of the derivatives market and the underlying cash market, which can jeopardize market stability.
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