Former MP Somaiya urges SEBI to temprarily suspend CAS after sharp Sensex volatility

Raising concerns over the newly implemented Closing Auction Session CAS mechanism that caused unusual movements in the benchmark index Sensex on Thursday former BJP MP Kirit Somaiya raised questions of manipulation and has asked SEBI to temporarily suspend CAS according to news agency IANSIn his letter to Securities and Exchange Board of India SEBI Chairman Tuhin Kanta Pandey Somaiya sought the regulators attention to the market movement between 320 pm and 330 pm on August 27 when the Sensex reportedly crashed by more than 2200 points before recovering around 2000 pointsThe former member of Parliament sought not just an inquiry but also appropriate action based on its findingsThe sharp movement occurred during the first monthly derivatives expiry since the introduction of CAS on August 3 and has triggered wider concerns over liquidity and price discoveryFormer MP questions weakness and possible manipulation in CASQuestioning whether the unusual volatility pointed to a weakness in the CAS framework Somaiya urged SEBI to consider it seriously and said if the movement was due to an underlying weakness in the system then officials must offer explanation about itSomaiya further said the anomaly in the market movement could have been deliberate and speculated whether there was any attempt to undermine or sabotage the implementation of CASCiting an observation received from a market observer he said the lack of sufficient liquidity after 315 pm could contribute to heightened volatility because investors looking to buy or sell during that period may not find adequate depth in the market as per IANSSomaiya proposed for temporary suspension of CAS and asked the regulator its reintroduce it only after redesigning it based on practical considerations arguing that the present framework removes continuous trading liquidity at precisely the time when liquidity could be importantCurrently continuous trading in CAS securities ends at 315 pm after which the market moves into a separate closing auction while equity derivatives continue trading until 340 pmSomaiya contests that closing auction should ideally build on existing market liquidity rather than first removing continuous liquidity and then attempting to recreate it through an auctionHe also raised concerns over the fragmentation of closing liquidity between the NSE and BSE He pointed out that the same security can currently undergo separate closing auctions on the two exchanges with separate order books imbalances and potentially different equilibrium prices as per IANSWhy was CAS introducedCAS was implemented on August 3 to make the price discovery mechanism more robust and transparent The closing auction mechanism for shares having futures and options contracts consists of a dedicated 20minute session during which buy and sell orders are collected to determine an equilibrium closing price for a stockThe final price is discovered at the level where the maximum executable volume is matched The new framework swaps the earlier methodology of using the weighted average of trades executed during the final 30 minutes of the regular trading session to calculate the closing pricesThe regulator had said CAS will help to achieve crossmarket consistency and enhance the robustness of Indiarsquos price discovery mechanism making it fairer and more transparentWhat happened when CAS was introducedFollowing the introduction of the new CAS system on August 3 the Sensex jumped 54439 points or 070 per cent to settle at 7863903 while the Nifty climbed 39070 points or 160 per cent to end at 2477430This created uncertainty among market participants due to the divergence between the Sensex and the Nifty as usually the benchmark indices are in syncSEBI has maintained no manipulation in CASAmid concerns over CAS the market regulator had said it had found no evidence of manipulation in the mechanism and SEBI chief had stated the market regulator can easily detect if someone is trying to rig the systemWe can catch hold of manipulation in CAS relatively easily CAS is for transparency And if anybody feels that they will manipulate CAS for defaming the new system they are in danger Pandey had saidWith inputs from IANS