The Securities and Exchange Board of India (Sebi) is set to review the methodology for determining settlement prices for derivative contracts following the implementation of the Closing Auction Session (CAS). This move comes after feedback from market participants highlighted concerns about the CAS's impact on trading volumes and volatility.
The introduction of CAS has led to a significant drop in trading volumes on stock exchanges. According to reports, equity derivatives turnover on the NSE and BSE fell to multi-month lows in August. Analysts attribute this decline to increased volatility under the CAS mechanism, prompting market participants to reduce derivatives activity, especially during the last half-hour of trading.
In August, the NSE's total monthly equity derivative turnover was Rs 34.48 lakh crore, marking the lowest since November 2023. Similarly, BSE's turnover for the same month was Rs 32.2 lakh crore, the lowest since June 2025. Wall Street brokerage Jefferies noted that the uncertainty on expiry day due to CAS has deterred option writers, impacting proprietary traders' profitability.
Domestic brokerage ICICI Securities reported that BSE's premium ADTV in August was Rs 18,700 crore, a 26.5% decrease from July's Rs 25,400 crore. For the second quarter, the premium ADTV was Rs 22,000 crore, down 25.7% from the first quarter's Rs 29,700 crore. BSE's average daily option contracts traded stood at 98 million in August, down 34.5% from July.
The systemic average daily option contracts traded across BSE and NSE in August were 223 million, a 22.9% decrease from July. For the second quarter, this metric was 256 million, down 20% from the Q1FY27 average of 320 million.
The consultation paper expected next week will be closely watched by brokers, proprietary desks, institutional investors, and active derivatives traders. Any change in methodology could be crucial for managing expiry-day risks, potentially reducing sudden option price spikes linked to CAS movements.
Background
The CAS mechanism, introduced to determine the closing price of stocks in the cash segment, has faced criticism for its impact on trading dynamics. Sebi's review and potential adjustments aim to address these challenges and stabilize market conditions.
Sebi's forthcoming consultation paper will be pivotal in addressing the challenges posed by CAS. Market participants are keenly awaiting potential changes that could stabilize trading volumes and reduce volatility, ensuring a more predictable trading environment.
