SEBI Scrutinizes CAS Trades After Sharp Index Jumps, Targeting Potential Manipulation

SEBI Scrutinizes CAS Trades After Sharp Index Jumps, Targeting Potential Manipulation​

The Securities and Exchange Board of India (SEBI) has initiated a close examination of trades executed during the Closing Auction Session (CAS) on August 3rd and 4th. The regulator is probing these transactions to determine if any attempt at market manipulation occurred. This stringent oversight follows concerns raised by market participants regarding disproportionate movements in index levels before and after the CAS sessions.

SEBI Investigation into Price Movements​

SEBI has requested trading data from stock exchanges for the initial two days of the new closing mechanism. After receiving the necessary information, the regulator is currently analyzing these trades.

Sources indicate that the investigation focuses on checking whether the wide gap between pre-CAS and post-CAS index levels was natural or if specific trades were placed deliberately to manipulate the final closing price. This scrutiny stems from sharp differences observed in Nifty's trajectory across those two trading days.

On August 3rd, the first day of CAS, the Nifty stood around 24,573 at 3:28 pm. It subsequently moved to approximately 24,774 by 3:30 pm, registering a jump of about 201 points in the final minutes of trading.

Similarly, on August 4th, the Nifty was recorded around 24,463 at 3 pm. By 3:15 pm, it had risen to roughly 24,615, marking a gain of about 152 points during the auction period.

Understanding the Risk of Manipulation in CAS​

Market participants highlighted that weak liquidity during the CAS period escalates the risk of manipulation. This vulnerability is especially true for indices or stocks exhibiting relatively low cash market turnover.

A potential manipulative strategy involves a large fund or group of operators taking positions on an index while simultaneously investing heavily in a passive index fund. Such actions could be designed to influence and push the index higher during the auction time.

Market participants noted that these possibilities are heightened on expiry days, especially for indices with low cash market turnover, such as Rs 100-200 crore during CAS.

Challenges in Proving Manipulation​

While the risk exists, establishing that certain trades were manipulative could be highly complex. Market experts cautioned that SEBI must prove an intention to influence the index or its closing price.

One source added that merely identifying a trade that impacted the index is insufficient for regulatory action. It must be established that there was a coordinated movement by multiple parties aimed at manipulating the index.

Regulatory Measures and CAS Background​

To address the threat of manipulation due to low participation, SEBI is intensely monitoring trading activity. The regulator has also instructed brokers to enhance retail investor participation and ensure indicative prices are displayed prominently on their trading applications.

Sources clarified that the probe into these trades is intended to ensure orderly market trade, not to discourage genuine traders. This strict monitoring mechanism was originally planned before the implementation of CAS.

The Closing Auction Session (CAS) is a 15-minute auction held daily from 3:15 pm to 3:30 pm. Its function is to determine the official closing price for eligible securities. Buy and sell orders are collected and matched at an equilibrium price that maximizes traded volume.

CAS was introduced as part of efforts to improve price discovery, make closing prices more representative, and align India's market structure with global standards while reducing opportunities for manipulation.