India's Securities and Exchange Board of India (SEBI) announced a review of how settlement prices for derivative contracts are determined on expiry, a month after rolling out its new Closing Auction Session (CAS). This decision comes after market participants reported unpredictable price swings and uncertainty, with one trader, Rohit Tiwari, experiencing a loss of approximately $4,640 (₹388,000) on Sensex monthly options during an auction, despite having smaller positions and hedges. Another trader reported losses of $2,400-$3,600 (₹200,000-₹300,000) on Nifty's monthly expiry.
The CAS mechanism, introduced in August to enhance price transparency and prevent manipulation, has been met with low participation and sharp price movements in the final 15 minutes of trading. The BSE Sensex, for instance, plunged about 2,100 points in the first five minutes of trading on a recent expiry day. Derivatives turnover, which constitutes the majority of trading in India, saw a 20% month-on-month decrease in August, according to Jefferies, while some algorithmic traders cut their activity by 35%-40%. The National Stock Exchange, however, saw average daily cash equities turnover drop by only 0.6%.
SEBI introduced CAS in the equity cash segment on August 3, 2026, as per a circular dated January 16, 2026. The closing price determined through CAS also serves as the basis for settlement prices of derivative contracts on expiry. Traders and brokers have voiced concerns that these CAS-determined prices, established within a brief auction window, are more volatile and susceptible to last-minute order imbalances, directly affecting F&O expiry payouts. Experts like Chandan Taparia from Motilal Oswal Financial Services have suggested narrowing the 3% price band for orders to 1-1.5% to reduce volatility. SEBI plans to issue a consultation paper with proposed changes to the methodology, but there is no indication of rolling back the CAS system itself.
Quantitative trading firms have significantly reduced their activity, with QCAlpha Advisors cutting expiry-day volumes by 70%-75% during the auction window due to concerns about opacity and order execution. Vishal Mehta, CEO of MarketScanner, has also cut options positions by 35%-40%. Critics like Rohit Srivastava of Indiacharts.com and Strike Money argue that the issue is not SEBI's intent but the speed of implementation, as many retail investors and traders are not equipped for the specific order types required by the auction. He suggested a temporary rollback until brokers are ready. Despite the criticism, SEBI Chairman Tuhin Kanta Pandey has defended CAS, stating that increased participation and liquidity will stabilize the system over time.
