The Securities and Exchange Board of India is likely to pause the closing auction session (CAS) rollout in equity derivatives for a year, and retain the previous volume weighted average price (VWAP) method for settlement calculation on the expiry day, two people close to the development told VCCircle.
The capital markets regulator introduced CAS, a new way to determine the closing price of stocks, this January in a phased manner. It later proposed two ways for the derivatives segment to transition into the new framework: one was to use a blended method involving both the new CAS and previous VWAP, and the second was to retain the previous VWAP-based method for at least a year. SEBI is now likely to go with the latter, the people said, asking not to be identified.
The regulator is holding a special meeting with the Secondary Market Advisory Committee (SMAC) on Thursday to discuss CAS, said one of the persons.
SEBI has received over 20,000 comments on the consultation paper that reviewed CAS implementation for derivatives. Most comments asked for the second option involving a one-year pause, the second person said.
The regulator is likely to go with this market sentiment, said both persons, though a third person VCCircle spoke to said that stock exchanges seem to be expecting the blended option.
SEBI did not respond to VCCircle’s queries till the time of publishing this article.
In its consultation paper issued this September, SEBI made it clear that even if it retains the old VWAP-based price-discovery method for the derivatives segment for a year or more, it intends to move to the blended mechanism in the long-term.
What is CAS?
The closing auction session brings all the sell and buy orders over the last 20 minutes of a trading session (between 3.15 pm to 3.35 pm) together. It then fixes the closing price as the one at which the maximum number of trades can go through.
Until now, the closing price of a stock was determined by taking a volume-weighted average price of all trades done in the last half hour of the market (3:00–3:30 pm). This method was causing tracking error for passive funds and these funds, particularly foreign funds, had raised this matter with the regulator.
Problem in derivatives segment
Traders were facing increased uncertainty from CAS, which was particularly concerning because there is a large retail participation in the Indian derivatives market.
Trading was also getting concentrated towards the end of the regular trading session and the transition period into CAS, with retail participants taking derivative trades based on the initial few minutes of CAS even though the auction could settle at a completely different price in the end.
