Former BJP MP Kirit Somaiya Calls for SEBI Investigation into Sudden Sensex Fluctuations During CAS.

Recent developments regarding the performance of the Sensex during the Closing Auction Session (CAS) have drawn the attention of Kirit Somaiya, a prominent political figure in India. On August 27, the Sensex experienced a dramatic fluctuation, plunging over 2,000 points within just several minutes, prompting investors to question the robustness of the newly implemented CAS mechanism. Following its introduction on August 3, the CAS was designed to aggregate buy and sell orders to establish a single equilibrium price at the close of trading, marking a significant shift from the previous volume-weighted average price (VWAP) methodology. This volatility raises concerns not only about the mechanics of the CAS but also about underlying liquidity issues that surfaced notably after 3:15 PM, as liquidity in the market swiftly dried up, leading to unpredictable price swings.

The analysis shared by Somaiya emphasizes that the reduction in trading volume during the CAS is creating an environment where price discovery is hampered, particularly as the continuous trading phase concludes. He suggests that the separate auction systems on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) could further fragment liquidity, making it challenging for investors to achieve optimal pricing at the end of the trading day. The initial volume reported during the first day of CAS shows a striking disparity, with the NSE handling substantially more turnover compared to the BSE, highlighting this liquidity fragmentation issue. Additionally, the disparities in closing prices from different exchanges raise serious questions about the reliability of the closing values used for determining mutual fund net asset values (NAVs) and other critical financial metrics.

Moreover, the commentary criticizes the design of the CAS, particularly the ±3% auction band, suggesting that it may lead to exaggerated shifts in market capitalization for larger firms without substantial backing in trades. This can foster considerable uncertainty in marked-to-market valuations, signaling potential risks for both institutional and retail investors. The report proposes a need for reevaluation of the CAS framework to address the minimum liquidity requirements and market quality safeguards necessary to maintain transparency and robustness in price formation processes. It highlights the critical interplay between cash and derivatives markets, stressing that the differing trading schedules may compromise traditional arbitrage strategies at pivotal moments.

Source: The Economic Times

(Expert Note: This intelligence brief was structured and verified by the Wealthova editorial desk.)