Was Sensex’s 2,000-point expiry crash a one-off? Here’s what Friday’s close hints about CAS
On Friday, the Sensex rose about 200 points in the six minutes before the closing auction kicked in. The move was decent, but nowhere close to Thursday’s sharp expiry-day collapse, when the index plunged from around 77,200 at 3.17 pm to nearly 74,983 at 3.23 pm before recovering part of the losses.
The Thursday move had rattled traders because it came during the first monthly derivatives expiry after the introduction of CAS. The Sensex eventually closed 539 points, or 0.7%, lower at 76,934. But the intraday crash in the closing window sparked anger on social media.
Friday’s quieter close, however, suggested that the extreme move may have been linked more to expiry-day positioning and thin auction liquidity than to a permanent flaw in the new closing auction framework.
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Expiry made the move worse
The concern around Thursday’s move was the timing. Monthly expiry meant that stock futures and options, index options and physically settled positions were all tied to the closing price.
Under CAS, closing prices are discovered through an auction rather than the old closing-price method. That makes the final minutes more important, especially on expiry day. A sharp move in the auction price can change whether an option expires worthless or becomes in the money. In stock options, that can also create delivery or funding obligations.Sebi Chairman Tuhin Kanta Pandey, however, has said the regulator is not looking at any changes to CAS. He said the system is new and market participants will understand the closing auction better over time and participate more.
CAS depends on enough participation from cash market investors, arbitrage desks, institutions and trading firms. If participation is thin, large orders can move the indicative closing price sharply.
Hitesh Rathi, Technical Analyst of Equity & Derivatives at Angel One, said CAS has been introduced with a good intention. But he pointed out that BSE has about 35% share of India’s F&O market and only about 5% of cash market volumes. Thin cash market volumes may have been the main reason behind the sharp Sensex spikes, he said.
The unease around CAS did not begin with Thursday’s monthly expiry. Earlier this month, Sebi had flagged three sharp Sensex spikes during the auction session on August 13 and alleged that two entities may have manipulated the index on weekly expiry.
According to Sebi, Copthall Mauritius Investment, an entity owned by JPMorgan Chase, was the dominant buyer during that auction. The regulator said Copthall accounted for 86.6% of the gross buy value in Sensex constituents during CAS.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
