How did Sensex crash 2,000 points in 6 minutes while Nifty stayed stable?

Indian benchmark indices witnessed their first monthly expiries this week since the introduction of the closing auction session (CAS), with the Sensex experiencing sharp downward spikes before recovering some losses on Thursday. The unusual move triggered an outcry among traders on social media.

During the CAS session on Thursday, the Sensex plunged more than 2,000 points within minutes, falling from around 77,200 at 3:17 pm to nearly 74,983 at 3:23 pm. The index eventually recovered some losses but still closed 539 points, or 0.7%, lower at 76,934.

The sharp swings drew strong reactions from traders on X, with some describing the move as “deadly” and “daylight robbery.”

Notably, this came after Nifty had ended in the green on Tuesday on its first expiry day since the launch of CAS, introduced on August 3, changing the way closing prices are calculated for stocks included in the futures and options (F&O) segment.

Nifty comparatively saw milder spikes during the closing session. Weekly expiries had already tested the system, but monthly expiry carries a wider impact because stock futures and options also come into play.
Sebi Chairman Tuhin Kanta Pandey has previously said the market regulator is not looking at any changes to CAS, even as the new closing-price mechanism came under fresh scrutiny after sharp expiry-day swings in the Sensex.
Also read | Sebi chief Tuhin Kanta Pandey clarifies on CAS changes after big Sensex expiry-day swing
The question now remains what is causing the wide divergence between Sensex and Nifty, and will this trend continue? ET Markets spoke to market experts on the new closing auction session who highlighted that thin trading volumes were the main culprit.

Why Sensex saw wilder spikes during CAS?

CAS is a fairly new mechanism that has been introduced to the market, and the intention is noble, said Hitesh Rathi, Technical Analyst of Equity & Derivatives at Angel One. He however noted that BSE holds around 35% share of India’s F&O market but only about 5% of cash market volumes. Such thin volumes may have been the primary reason for such sharp spikes in Sensex, according to the analyst.

Nandish Shah, Senior Derivative and Technical Analyst at HDFC Securities, also said volumes are low in CAS, and that is what is leading to the sharp divergence in the pre-CAS price and overall closing price. Once participation increases, the analyst believes this would improve. He feels investors should not read much into the divergence between Nifty and Sensex during the CAS session.

Also read | Monthly Expiry shock: Did CAS fail its biggest test after Sensex loses 2,000 points in 6 minutes?

When will the CAS-related issues subside?

While Hitesh Rathi of Angel One understands the regulator’s push for price parity between ETFs and mutual funds, he sees no reason to link F&O expiry to an indicated price. With traders already anxious, he said the final 15 minutes now feel like a “lottery ticket”.

“I am not sure if this would work out even in the long run or how it would pan out in the long run. It is a very difficult thing to point at this point in time. But again, the intention is normal to avoid that tracking error that you have for ETFs and index funds and mutual funds,” he concluded.

Sensex manipulation claims

Sebi earlier this month highlighted there were three sharp spikes in Sensex during the auction session on August 13, alleging that two entities may have manipulated the index on its weekly expiry. According to Sebi, Copthall Mauritius Investment, which is an entity owned by JPMorgan Chase, was the dominant buyer during the auction. It accounted for a whopping 86.6% of gross buy value in Sensex constituents during CAS.

While Copthall’s heavy buy orders were allegedly creating huge spikes in Sensex, another entity was heavily placing sell orders, pulling the index down. According to the market regulator, Mumbai-based Mansi Share and Stock Broking Private Limited allegedly placed large sell orders at lower prices and then cancelled them.

Sebi did not at this stage allege that Copthall and Mansi acted in concert. Instead, it said the two entities adopted opposite but aggressive price-impacting strategies during the same CAS session. The regulator estimated alleged wrongful gains of Rs 2.96 crore for Copthall and Rs 71.64 lakh for Mansi, taking the total to Rs 3.67 crore.

Sebi barred Copthall Mauritius Investment and Mansi Share and Stock Broking from accessing the securities market and participating in the CAS, alleging the two entities manipulated the Sensex on the August 13 expiry day to benefit from their derivatives positions.

Manipulation in CAS has serious market implications because the auction-discovered price is used for options settlement, mutual fund net asset value calculation and other market functions, the market regulator said in its order. It said such conduct, if allowed to continue, could damage fair price discovery and harm investors who trade in derivatives or invest through mutual funds.

Also read | Explained: How a JP Morgan unit and a Mumbai-based stock broking firm allegedly manipulated Sensex during CAS

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)