SEBI Chief Warns of Initial CAS Liquidity Issues in Global Markets

Sebi Chief Highlights Initial Liquidity Challenges with Closing Auction Session

The Securities and Exchange Board of India (Sebi) acknowledges early liquidity issues in global markets following the implementation of the Closing Auction Session (CAS).

Understanding the Closing Auction Session (CAS)

The Closing Auction Session (CAS) is a mechanism designed to determine stock prices at the end of trading sessions. It aims to enhance price discovery and reduce volatility during market close. However, as highlighted by Sebi’s chairman, the initial phase of implementing CAS has raised concerns regarding liquidity, a common issue observed in other global markets during their respective rollouts.

Global Context of CAS Implementation

Pandey noted that jurisdictions such as the US, Japan, and Hong Kong have experienced similar liquidity challenges when implementing CAS. For instance, Hong Kong initially launched CAS in 2008 but withdrew it due to significant end-of-day price swings before reintroducing it in 2016 with modifications. This historical context underscores the importance of patience and gradual adaptation in the market.

Sebi’s Response and Future Directions

In response to feedback from market participants, Sebi is preparing a consultation paper to address the methodology for determining settlement prices of derivative contracts. This initiative aims to refine the CAS framework and potentially introduce temporary solutions to enhance liquidity. The regulator is keen on balancing the need for effective market mechanisms with the realities of initial implementation challenges.

Leveraging Technology for Market Surveillance

During the Global Fintech Fest 2026, Pandey also discussed Sebi’s increasing reliance on artificial intelligence (AI) tools for market surveillance. These tools, such as the Surveillance of Unauthorized Digital Activity via Real-time Scanner for Anti-fraud (Sudarsan) and the Regulatory AI-Driven Advertisement Reviewer (R(AI)DAR), are designed to enhance the regulator’s ability to monitor market activities and ensure compliance. By transitioning from periodic to proactive monitoring, Sebi aims to identify risks earlier and improve overall market integrity.

Key Highlights

• Initial liquidity issues with CAS are common across global markets, as noted by Sebi’s chairman.
• Sebi plans to issue a consultation paper addressing settlement price methodologies for derivatives.
• Historical examples from Hong Kong highlight the challenges and adjustments needed for CAS implementation.
• Sebi is leveraging AI tools to enhance market surveillance and proactive monitoring.
• The regulator emphasizes the need for competent oversight and the management of AI-related risks.

Investor Note: The ongoing discussions around CAS and its liquidity challenges could impact trading strategies and market dynamics in the short term. Investors should stay informed about Sebi’s upcoming proposals and consider their implications for market operations and derivative trading.