CAS Suggestion Email to SEBI

Dear Sir/Madam,

I respectfully request SEBI and the relevant Market Infrastructure Institutions to urgently review the interaction between the newly introduced Closing Auction Session (CAS) in the equity cash market and expiring 0DTE derivative contracts.

We fully recognise the rationale behind CAS and support the objective of improving closing-price discovery, transparency and institutional execution.

Our concern is specifically with the interaction between CAS and same-day-expiry derivatives, where the final cash-market price can have a disproportionately large impact on derivative settlement while the underlying is no longer available for continuous trading.

The issue is no longer purely theoretical. The first few sessions following the implementation of CAS have provided preliminary market evidence that warrants immediate examination.

Though there are many markets who have adopted CAS, our markets are structurally different.

• Our cash markets do not have deep liquidity due to various reasons including high transaction costs
• The ratio of derivative volumes to cash market volumes is substantially higher than any other markets in the world.
• Our markets don't have designated market makers for reducing auction imbalance
• Our markets do not have completely free short selling, the existing SLBM has many restrictions.

1.The structural timing mismatch between CAS and 0DTE derivatives

The final CAS price can have a direct and potentially very large economic impact on 0DTE derivative positions which attract far more capital than thinly liquid auction markets.

Even after 3 weeks of the implementation of the system, average CAS volumes in NSE is around 800 crores and BSE is around 50 crores. The question raises about the fairness of the entire system which decides the settlement of 0DTE contracts with notional exposure of approximately 1 lac crore using the price discovery that happened in such a thinly liquid auction. It is to note that CAS volumes are 1/10th of the volumes in the VWAP regime.

2.Early empirical evidence: unusually large closing movements

Due to fairly thin auction volumes, it is easy for people to influence prices which has catastrophic impact on 0DTE options. We already saw the first few days of price distortions.

3.Concentration of entire day's risk in the final few minutes

Due to large volumes on 0 DTE, participants carrying thousands of lots, the economic impact can therefore run into crores of rupees from a relatively short-lived movement in the underlying. This also opens systemic risk especially on expiry days.

4.Real-time exposure of order flow in the closing window

The CAS mechanism captures and reports all orders, including modifications and cancellations, in near real time. Over the last 25 minutes of the session this amounts to a microscopic view of what large participants are doing, published while they are still doing it.

0DTE options are uniquely exposed to this:

• Short lifespan. The contracts expire the same day, which makes the closing window the critical period for adjustment rather than one period among many.
• High order churn. Participants hedging a large book modify and cancel orders constantly, and every one of those actions is now observable.
• Information leakage. What is disclosed is not merely activity but intent, and intent is precisely what makes front-running possible.
• Market abuse. Visible intent invites quote stuffing and spoofing directed against it, and the volatility that follows is manufactured rather than informational.

The change in the closing half hour is visible in the market data itself.

• Before CAS. Orders were anonymous and price discovery was smooth. Spreads stayed narrow, price movement was stable, liquidity was healthy, and the settlement price was accepted as fair.
• After CAS. Orders are exposed in real time and intent leaks with them. Spreads have widened, slippage has risen, liquidity has thinned, volatility spikes as the close approaches, quote stuffing and front-running have become features of the window, and the settlement price itself is distorted. The advantage sits with the fastest participants reading the feed, which in practice means high-frequency operators.

That cost is paid by retail participants, in transaction costs and in confidence in the closing price.

5.Easier Manipulation & Spoofing

This is particularly true for 0DTE where huge positions can be taken in highly liquid derivative markets and move the CAS IEP to their desired levels and profit from derivatives

We saw a similar kind of practice by Jane Street back in 2024.

Even the alleged manipulation by Copthall Mauritius & Mansi Broking followed a similar pattern of spoofing and manipulation. Yes, the action against them was quick and decisive but the question remains, what would stop other entities to form syndicates & nexus and carry out similar manipulation. It would be harder for the regulator to keep investigating these things.

6.Retail Losses and compensation

Even if manipulators get penalised, what about the losses of the retail traders who lost due to these manipulations? How can one identify them and compensate for the losses? As I understand SEBI is focussed on reducing retail losses and this CAS is having the exact opposite consequence.

7.How other markets handle the same reporting

Every major market collects order and trade data of this kind, and every regulator uses it. The difference is not whether the data is collected. It is when the data becomes visible, and to whom.

In the markets we are usually compared with, the record goes to the regulator after the trading day has ended, and other participants never see it. Under CAS the same information is published to the market while the session is still running.

• United States (CFTC and SEC). Reported to regulators within T+1. Real-time order details are not exposed. Used for surveillance and compliance.
• Europe (ESMA). MiFID II post-trade reporting with deferral, and no real-time disclosure of order intent.
• Singapore (MAS). Reported at end of day, which supports surveillance without disturbing live trading.
• Hong Kong (SFC). Reported with an appropriate deferral, directed at market integrity rather than live transparency.
• Australia (ASIC). Reported at T+1, with no real-time order disclosure.

The sequence is the same in each of them: orders are placed and matched anonymously, execution follows, and the record is generated after the close. None of these regimes affects price discovery, because by the time anyone other than the regulator could act on the data, there is nothing left to act on.

The same information that is a surveillance record after the close is a trading signal during the session. That is the whole of our objection. It is not that CAS collects this information; it is that it publishes it while it can still be used against the participants who generated it.

Our position is not against CAS

I would like to emphasise that our submission is not an objection to the Closing Auction Session itself.

SEBI's stated objectives of improving price discovery, transparency and institutional execution are legitimate. SEBI's consultation paper itself notes that CAS is intended to aggregate diverse market interests and produce a single equilibrium price.

Our concern is that a mechanism designed to improve cash-market closing-price formation may have an unintended consequence when that price simultaneously becomes the settlement determinant for an extremely high-gamma, zero-day-to-expiry derivative market.

The appropriate regulatory response need not be to reconsider CAS as a whole.

It may simply be to recognise that cash-market closing auctions and 0DTE derivatives have fundamentally different liquidity and risk characteristics and therefore should not necessarily share the same settlement interface.

Between them, these two changes would restore fair price discovery in the closing window, reduce the scope for market abuse, protect retail participants, and bring our practice into line with the markets we are usually measured against. Neither of them requires reconsidering CAS itself.

These changes can eliminate any downside that an otherwise excellent system can potentially have. Since we traders believe that our regulator does listen to rational arguments, I am hoping these suggestions are considered and implemented.