Capitalmind with Deepak & Shray

What Is the Closing Auction Session (CAS) and How Does It Affect Investors?

1h 7min

This episode explains the new Closing Auction Session (CAS) introduced by SEBI to determine stock closing prices, replacing the old volume-weighted average of the last 30 minutes. The hosts discuss how CAS works, its impact on mutual funds, index funds, and options traders, and the teething problems of low liquidity and price discovery. They conclude that while the system is theoretically sound and used globally, it needs more participation and transparency to stabilize.

Summarized by Podsumo

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✨ Key Takeaways

1

CAS replaces the old closing price mechanism (volume-weighted average of last 30 minutes) to prevent manipulation in the final minute of trading.
2

The auction works by collecting limit and market orders between 3:20-3:30 PM, then finding an equilibrium price that maximizes matched volume, executed at a random time between 3:28-3:30 PM.
3

Current low liquidity causes closing prices to deviate significantly from trading ranges (e.g., Bharti Airtel closed 0.5% below its low, TI India closed 1% above its high), making them unreliable for index funds and arbitrageurs.
4

The system has caused a 33-40% drop in options premium turnover due to increased uncertainty, as traders cannot predict the closing price accurately.
5

Participation by arbitrageurs, family offices, and institutional investors is needed to bring liquidity and efficiency, but current rules and lack of full order book transparency hinder this.

💬 Notable Quotes

"The volatility in that window is a little unnecessary. Can we do a better mechanism? It's a little bit like if you go to a booth when there's nobody, you can go anytime you want, but if there are a lot of people, they organize you into a line. — Deepak"
"I could be the I could bid at the highest price possible and get zero shares because the market orders worked out in a way that I didn't get anything. So there is no guarantee I will get execution. — Shray"
"It is this that will eventually say 29.63 doesn't make sense, it'll become 29.60, then 29.55, and then all the way down to near market price. It needs those people to take advantage of those arbitrage opportunities so that the arbitrage opportunities reduce in time. — Deepak"