Jefferies has highlighted that the Securities and Exchange Board of India's (Sebi) proposed changes to the Closing Auction Session (CAS) could reduce volatility in index prices on expiry days. The international brokerage, however, maintains a negative outlook on BSE shares despite these changes.
On Saturday, Sebi proposed two options for determining expiry-day settlement prices for index and stock derivatives. The consultation paper also suggested changes to the timing of the continuous trading session, CAS, and derivatives trading, aiming to enhance the new session. Jefferies noted that the CAS, introduced by Sebi in August, initially led to higher losses for domestic proprietary traders due to last-hour volatility on expiry days. The new proposal addresses these concerns by changing the settlement price of derivatives to a volume-weighted average price (VWAP) or a blend between VWAP and CAS, and discontinuing the cancellation of limit orders placed beyond +/- 1% of the reference price during CAS.
Jefferies believes that the return to a VWAP-based derivative settlement price and the inability to cancel limit orders beyond the +/-1% threshold should reduce end-of-period volatility on expiry days. The last date for submitting responses to Sebi's consultation paper is October 3, with implementation likely from October or November this year. While options premium turnover and orders were adversely impacted during August 2026, both have recovered in September as traders gained a better understanding of CAS.
“Our discussions with domestic prop traders indicate the return to VWAP-based derivative settlement price along with inability to cancel limit orders placed beyond +/-1% threshold should reduce end of period volatility on expiry days.”
Jefferies
Despite its positive view on the latest CAS proposals, Jefferies remains negative on BSE, maintaining its ‘Underperform’ rating with a target price of Rs 2,940 per share, implying a downside potential of over 13% from the previous closing price of Rs 3,384. The brokerage's stance is due to the stagnation in the options industry over the past two years and the nearing ceiling of market-share gains.
Jefferies prefers Groww as a better investment in India's equity story, expecting it to benefit from resolved CAS issues as futures and options account for around 55% of its revenues. The brokerage projects a 30% PAT CAGR over FY26-29 for Groww, driven by growth in its broking business, new initiatives, and margin expansion.
Background
The CAS system, introduced on August 3, changes how closing prices are calculated for stocks in the futures and options segment. It involves a 20-minute auction process from 3:15 pm to 3:35 pm to determine official closing prices, aimed at improving price discovery and reducing last-minute trade impacts.
As Sebi's consultation paper progresses, market participants will be keenly watching for the final decisions and their implications on trading dynamics. The potential changes could significantly impact volatility and liquidity in the derivatives market.
