SEBI CAS review draws over 20,000 responses as traders resist VWAP shift

Traders Push Back on SEBI’s Proposed Changes to Closing Auction Session

The Securities and Exchange Board of India faces significant pushback from traders regarding its proposed changes to the Closing Auction Session (CAS) methodology.

High Volume of Responses Signals Industry Concern

The Securities and Exchange Board of India (SEBI) has received an unprecedented response to its consultation paper on the CAS, with over 20,000 comments submitted by traders and market participants. This level of engagement underscores the industry’s apprehension regarding proposed changes to the CAS framework, particularly the shift from the current continuous trading session (CTS) VWAP method to a blended approach that incorporates CAS. The feedback period has now closed, and SEBI is expected to carefully evaluate these responses before making any decisions.

The CAS mechanism was introduced to enhance the settlement process for stocks with derivatives contracts, but its implementation has faced criticism, particularly due to a noticeable decline in trading volumes in the futures and options (F&O) segment. Traders have raised concerns about the potential for market manipulation during the CAS, prompting SEBI to revisit its framework.

Traders Favor Continuation of Current Methodology

SEBI’s consultation paper proposed two alternatives for determining expiry-day settlement prices: a blended VWAP that includes trades during the last 30 minutes of the CTS and the 10-minute CAS, or the continuation of the CTS-only VWAP for at least a year before considering a transition. The overwhelming consensus among traders is to retain the existing CTS-only VWAP method, which they argue is more familiar and transparent.

Participants believe that maintaining the current methodology will allow the CAS to develop its own liquidity and price-discovery characteristics before integrating its trades into the derivatives settlement process. The Futures Industry Association (FIA), representing various global trading entities, echoed these sentiments in its response, advocating for the CTS-VWAP as an interim solution.

Concerns Over Market Transparency and Liquidity

The FIA raised significant concerns about the proposed blended VWAP, noting that the variable weights assigned to the CTS and CAS would only be known post-auction, complicating the tracking of settlement prices. This uncertainty could adversely affect various market participants, including funds using index futures for hedging and arbitrageurs whose positions rely on precise exposure management.

Moreover, the FIA highlighted the observed decrease in trading volumes during the CAS and recommended that any future transition to a blended VWAP should be contingent on a clearly defined liquidity trigger. This would ensure that the auction has sufficient liquidity before being incorporated into derivatives settlement processes.

Proposed Changes to Market Timings and Information Dissemination

On the topic of market timings, the FIA and other traders have supported SEBI’s Option A, which suggests extending continuous trading in CAS stocks until 3:30 PM, followed by the auction, with derivatives trading continuing until 3:45 PM. This extension is seen as beneficial for price discovery and aligning the derivatives close more closely with the cash-market closing process.

However, the FIA opposed SEBI’s proposal to stop disseminating the indicative index value (IIV) during the CAS, arguing that IIVs provide critical real-time insights into closing price formation and enhance market surveillance. The removal of this information could diminish transparency without effectively addressing manipulation risks.

Key Highlights

• SEBI received over 20,000 responses on its CAS consultation paper, indicating strong trader engagement.
• Traders prefer the continuation of the CTS-only VWAP method over the proposed blended VWAP.
• The FIA highlighted concerns about the potential for market manipulation during CAS.
• Proposed changes to market timings include extending continuous trading until 3:30 PM.
• Opposition to the removal of indicative index values during CAS due to transparency concerns.

Investor Note: The ongoing discussions around SEBI’s CAS framework highlight the importance of trader feedback in shaping market regulations. Investors should stay informed about potential changes that could impact trading strategies and market dynamics in the near future.