SEBI Does Not Owe CAS A Future; It Owes The Market An Open Mind
The most dangerous words in regulation are sometimes not “we were wrong”; they are “we can fix it”. They sound responsible. But there comes a point when fixing a decision becomes a way of avoiding the more uncomfortable question of whether the decision itself should survive. SEBI’s handling of the Closing Auction Session (CAS) is beginning to approach that point. CAS And Its Stated Goals CAS went…
The Closing Auction Session (CAS) regulation, launched by SEBI on August 3, aimed to enhance price discovery and enable investors to trade at the closing price. The proposal was inspired by the fact that many international markets employ closing auctions, but there was no evidence that this approach would work effectively in India. Since its launch, SEBI has not provided any empirical data demonstrating improvements in price discovery, reduced volatility, or lower vulnerability to strategic trading.
India's market structure differs significantly from other developed markets, with a higher proportion of retail participation in derivatives and a shallow securities lending and borrowing market. These factors suggest that CAS may not be the most suitable mechanism for India's market conditions. This discrepancy raises questions about the appropriateness of implementing a foreign mechanism without conducting a pre-launch study to evaluate its effectiveness in the Indian context.
After a few days of operation, SEBI intervened on August 13 to investigate unusual trading activity during CAS, leading to an ex-parte interim order alleging manipulative trades. While this incident does not definitively prove that CAS is defective, it raises concerns about the creation of new incentives or vulnerabilities through the new system.
SEBI's September 12 consultation paper proposed various changes to the settlement methodology, market timings, transition period, dissemination of indicative values, and order modification rules. These changes suggest a focus on making CAS work better rather than reconsidering its overall effectiveness.
The regulator's approach appears to be an escalation of commitment—introducing the mechanism, modifying its settlement process, and tightening order rules in response to problems that arise. This pattern may lead to a situation where SEBI defends the original decision with increased ingenuity, rather than openly reconsidering its suitability.
SEBI should instead apply the same discipline it expects from investors and be willing to abandon the CAS if evidence shows it is not serving the market's best interests. The regulator's credibility depends on its ability to change course when empirical evidence no longer supports the initial decision.
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