Closing Auction Session (CAS): How It Will Unfold

 

Closing Auction Session (CAS) is a hot topic among traders and equity market participants. Many traders feel uneasy, predicting volatility and uncertainty, especially since their strategies have traditionally revolved around VWAP (Volume Weighted Average Price) for all 0DTE (0 days to expiry) strategies.

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Recent Market Behavior and Concerns Around CAS

• In the last two expiry cycles, option prices spiked and then sharply dropped after the closing price was discovered.
• Many traders faced losses, even when their thesis was correct, because stop-losses triggered amid uncertainty.

Key Concerns About CAS:

1. Derived CAS prices are not visible on usual apps and terminals.
2. Uncertainty about the closing price creates fear.
3. Suspicions exist that closing prices can be manipulated.
4. Implied Volatility (IV) in options spikes on expiry and becomes highly volatile before close, with no exit for traders on the wrong side post-CAS.
5. High risk of fat finger trades distorting stock prices and the index closing price.
6. Index tends to close higher because many hold liquid cash rather than stocks.
7. Fear of CAS has reduced option volumes, decreasing liquidity.
8. SEBI regulations have tightened, limiting weekly expiries, increasing margins, and imposing other restrictions that impact the options market.
9. MWPL (Market-Wide Position Limit) based on stock delta creates uncertainty on position adjustments, forcing traders to close full positions.

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Understanding SEBI's Perspective and Market Evolution

• SEBI introduced CAS after thorough data analysis, global best practices review, and stakeholder feedback.
• The consultation paper was released for public comments in August 2025.
• SEBI’s past rules have increased exchange volumes, reduced defaults, enhanced technological use, and improved market transparency.
• Market microstructures evolve with regulatory changes, as seen in prior changes like migration from American to European options.

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Current Realities and Future Expectations

Transparency of CAS Prices

• Currently, CAS prices are not widely available except on select terminals (NEAT, BOLT, in-house CTCL using TBT data).
• Over time, software vendors and data providers will incorporate CAS price and anomaly data for better decision-making.

Uncertainty and Liquidity

• Closing prices can vary due to last-minute buy/sell orders or order withdrawals.
• Such outlier price movements will reduce as liquidity in CAS improves.

Potential for Price Manipulation

• Price rigging is possible now due to low liquidity.
• SEBI and exchanges actively monitor to prevent unfair manipulation.

Option Pricing and Volatility

• High option prices on 0DTE and subsequent theta decay happen post-CAS price discovery.
• With reduced uncertainty, option pricing will stabilize and follow its normal path.

Price Deviations in CAS

• Stock prices can deviate up to 3% during CAS.
• Large deviations often coincide with new fundamental information announced during CAS.

Index Closing Price Bias

• Index may close higher statistically due to liquid cash presence.
• Increasing liquidity is expected to balance this.

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CAS Participants and Liquidity Providers

• CAS was introduced primarily for institutional players to adjust portfolios and manage delta.
• Other participants include domestic institutional investors (DII), foreign institutional investors (FII), arbitrage mutual funds, proprietary desks, and family offices.

Role of Arbitrageurs and Institutions

• Arbitrageurs buy underlying shares and sell futures to optimize returns.
• They provide liquidity by entering bids/asks in CAS and hedging simultaneously in futures markets.
• Institutions with large positions adjust their portfolios during CAS to reduce tracking errors.

Algorithmic Trading and Market Access

• SEBI permits algo trading and DMA (Direct Market Access) for institutional clients.
• Participants use low latency software to capitalize on arbitrage opportunities across equity, derivatives, CAS, and SLBM segments.

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How Liquidity Will Emerge in CAS

Scenario 1: CAS Price Above Reference Price

• Arbitrageurs offer ask in the cash market, hedge by buying stock futures.
• DIIs with short futures positions covers by squaring off in CAS.
• Increased futures prices attract sellers, providing liquidity in Futures markets.
• SLBM (Securities Lending and Borrowing Mechanism) also facilitates short selling.

Scenario 2: CAS Price Below Reference Price

• Arbitrageurs bid in the cash market, hedge by selling futures.
• DIIs with arbitrage mandates participate similarly.
• Falling futures prices encourage short sellers to cover positions, adding liquidity.

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Price Deviation Expectations

• Rules allow stock and index to close within ±3% of settlement price.
• Arbitrageurs enter when deviations exceed approximately 0.50%, covering transaction cost, brokerage and finance costs.
• Index deviation of 0.50% translates to ±120 points in Nifty and ±400 points in Sensex, which is significant but unlikely to persist without major news.

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Thus, institutions will provide quotes in CAS and they will get liquidity in Futures market from speculators and from people who have offsetting long positions.

With Falling deviation between Closing price and Reference price, We will see return of volumes and sanity in option pricing of Stock and Index on Expiry day also.

Summary Flowcharts

  

1. CAS Price Discovery and Liquidity Flow

2. Market Participant Interaction in CAS

Valuation of Vodafone Idea Lmited Futures in case of Rights.

Vodafone Idea Limited (Idea) came with a Rights issue of massive 25K crores. The rights will be subscribed by Vodafone and Idea. Also any unsubscribe portion will be subscribed by promoters.

I am writing this blog not to discuss the valuation of the company but the valuation of its futures in Derivatives segment. It is my endeavor  to highlight the valuation of this instruments in this special situation.

Background : CMP of Idea is 33.30, March Futures is 31.95/-,  April Future is 29/- and May Futures is quoting at 26.55/-. The Ratio of Rights is 87 : 38 shares. 

I have received suggestions to buy Cash and sell May futures (though it is quoting at a very big discount ). The rationale is that the rights is @12.50 and since the issue is very big and in a beaten down sector there can be over-allotment.

Rather than commenting on strategy, if it is a good idea, I will jot the facts on valuation (Futures Prices) in front of you and then you can take a conscious decision.

Valuations : For every special situation rights like Rights, there will be corporate benefit in derivatives segment of NSE. The corporate benefit price is derived from Closing Cash price of Stock on eve of Ex-date.

I may not know the closing price of 29th Mar, so I will base my valuation of futures (Corporate action price ) at CMP.

Based on CMP, The Adjustment factor is 0.57, so the new

a) Lot size can be approx(21230)

b) Ex rights price will be 18.82/- (March Futures will not exist on Ex date)

c) Ex-right April Fut Price will be 16.45/- (29*12000/21230)

d) Ex-Right May Fut will be 15.01/- (26.55*12000/21230)

Interpretation :

So when you are buying shares @33.30, your cost (effective cost after rights) is 18.82.

Now if you sell May futures @15.01, effective price after adjustment. You will be incurring a straight loss, but there are high probability of over-allotment.

To reach a Break-even point (BEP), You may need an extra allotment of 168 shares for every 87 shares. It means you will need an over-allotment (1.94 times , Total allotment of 2.94 times).

(I am not considering Brokerage, STT, Statutory charges, Interest, Margins cost)

There seems optimism on over-allotment and I may not know if all institutions will apply/ over apply, as Retail / HNI shareholding is comparatively small.

I am only covering Futures pricing. Option pricing will involve different calculation.

I welcome your critical comments and suggestions.

This is not a recommendation to anybody whatsoever to buy OR sell any share, but it is my thought process and views on this topic.

PS : I will try to write blog at shorter frequency.

Physical settlement of derivatives : issues and solutions...

It is Easier said than done.....


SEBI has said, It will comulsory implement Physical settlement of Stock Futures in a calibrated manner. (Here)  The intentions are noble and its a global practice.

The volumes on exchanges have extrapolated since the advent of Derivatives. It grew even more with advent of Stock Futures, Stock Options and Weekly Bank Nifty Options. One of the reasons for a rise in the volumes was simple product.

With change in Settlement process from cash to delivery, it may change the paradigm and valuation of derivatives product. We will here see regulatory challenges and possible remedial action. This discussion is to see a gradual transit without impacting volumes.

a) There is concept of Trading Members(TM), Clearing Members(CM) and Professional clearing Member(PCM). When there is a physical setlement, how would the billing be, also Pay-in  / Pay-out of Funds and Securities. (Current systems involves only money but If stocks are added, Risk will be become bigger for CM and PCM).

b) Risk of Assignment : As of now only In-the-Money stocks are assigned / Exercised and So the writer is aware of probabilty of assignment, but when the delivery is physical, there will be an unknown probability of assignment in Out-of-Money options also. (It should be remembered that Stock Options was changed from American type to European Type exercise for the same reason).

MCX has a different way to mark delivery as delivery period is for a few days, which is not possible in Equities, so there will be a  risk of assignment on option writer for OTM option and non-assignment for ITM options.

Corporate Action : As of now, Corporate actions are cash settled for Dividend, Rights, Bonus. There can be issues now, as participants may ask for shares or would be ready to give shares in corporate actions. (That can be taken care by defining rules, but that may lead to temporary mis-pricing.)

Settlement : As things stand, there can be different settlement for expiry, I dont think, there will be a bigger settlement on expiry, Which will also mean, there can be fall in volumes, which may also reduce liquidity.

Securities Transaction Tax: This is the trickiest thing for physical delivery, This will have to be tweaked by Finance ministry to align with delivery STT, else We will be able to buy / sell stocks using Futures and Options without paying STT.

Seller participants will pay only 0.01% on selling only and nothing on buying, Also only the participant exercising the option pays STT and writer won't. This anamoly would be used to reduce STT outflow. I am sure this anamoly will be fixed, but that will be at slower pace, as it involves Finance ministry and STT may appear only in the budget fot next year.

It is a welcome move, but These  issues need to be resolved for smooth implementation of physical settlement.

Suggestions:
a) let the settlement of stock futures be carried in next day trading in cash market, if that happens, all participants with open positions will have an opportunity to cover / close their positions.

There will issues in such implementation, but that will be only once. I am sure, it will help traders from not shying away in settlement days, inturn reducing volatility and mis-pricing.

PS: By bringing physical settlement, SEBI has closed the door for overseas stock futures mkt. If ever they are traded overseas , it will be a different product, just like NDF( Non deliverable forward) traded on Indian rupees.

Want to write more, but will do it via another blog.

I welcome your critical comments and suggestions.

Introduction of Graded Survelliance Measure (GSM) by Exchanges

SEBI, NSE and BSE are working hard to curb price manipulation on Stock Exchanges. There are also instances resulting in Tax Evasion using methods of Price-Rigging. In the past, Exchanges had put Risk- Management practice of declaring Illiquid Stocks, Periodic Call Auctions, Reduction in  Daily Price Freeze, Transferring Stocks in Trade-to-Trade Segment, Weekly/monthly/ Quarterly / Yearly Price Freeze etc

To further strengthen the Risk-Management and to Discourage Price Rigging and Tax-Evasion, NSE and BSE came out with another Surveillance measure "Graded Surveillance Measure (GSM)". The detail of circular are NSE here and BSE here.     

The Highlights of GSM are

a) Any abnormal price rise not commensurate with Financial health and Fundamentals like Earnings / Book Value / Fixed Asset / Net-worth / PE etc. will be identified.

b) All such identified stocks will be put in T2T with addition surveillance deposits of 100% or 200 % in Cash only by the buyers.

c) If after some time of imposing Additional surveillance deposits, The stocks remains volatile, They may be traded once weekly / Monthly and maybe with a ban on any further Price Rise.

d) The stock eligible for GSM will be identified from time to time and will be reviewed on Quarterly and Six Monthly basis. 

e) Additional Surveillance deposit will be credited only after quarterly review and It wont be refunded before quarterly review, even if the bought stock is sold in market.

The Points to ponder in this circular could be :

a) Exchanges want to curb the price rise and manipulation but hypothetically if GSM is declared in a particular stock, What may happen ? The buyers in such stock will vanish and also we may see many seller in the stocks.. but then who will buy? As buyers will have to pay additional surveillance deposits and may also probably get inquiries from stock exchange for buying. 

Then why would anybody buy that stock and If nobody buys it, price will also not fall. Also Volumes will dry and minority investor will be struck.

b) The Additional Surveillance deposits is payable only by the Buyers, and the Sellers rights are unhindered. It does not matter that sellers now were not selling when the price was rising,  also it does not  matter if the sellers are the promoters / operators along with other shareholders. They will get their money on payout.

c) As per circular, The criteria for stocks falling in GSM are conventional methods of Earning, Book Value, Fixed Assets, Net-worth , P/E etc but Are this criteria sufficient to decide if the stock is over- valued ? What about future expectations ? Higher valuation because of M & A target ? What about written down assets ? What about Investments of holding companies ? Expectation of some News / Orders / govt relaxations ?

There are different parameters to evaluate companies of different sectors and many Sectors have their unique valuation parameters . So GSM criteria can be biased on both criteria of escaping the GSM (IF accounts are manipulated) and Falling under GSM (If the companies have value but under different valuation model accepted in that industry).

Moreover GSM have yet not laid clear-cut criteria for stocks falling under it.

d) Since GSM have not laid clear-cut criteria for Stocks falling under it, There are probability to evaluation on Case-to-case basis and which may lead to decision based on perception of Risk Management officer.

e) Once the stock rises for few day, there will be fear of stocks coming under GSM, which may lead to players avoid the stocks and person who may be privy to news in such companies can make super normal profits.

f) Stocks however good, but once it falls under GSM, they may be tagged as tainted and will be avoided by traders.

g) Positively, If Risk-management is taken care using GSM, it makes a case for Weekly / Monthly / Quarterly / Yearly  circuits to go as unwanted price rise will be taken care by GSM.

i) The biggest impact may be on Small-caps and Micro-Caps.

I believe, Exchange will come out with more clarity and transparency on criteria for stocks falling under GSM, So that retail investors / Traders / Jobber / Market makers can avoid such stocks or exit from such stocks which can come under the ambit of GSM.

Bottom-line : GSM will suck liquidity from stocks and exits will become difficult.

This is not a recommendation to anybody whatsoever to buy OR sell any share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

SEBI Buyback Guidelines : Opportunity in National Aluminium

Business Schools taught us , Companies do Buyback of Shares to enhance shareholders value. But because of  Budget,2016 and New SEBI Buyback Guidelines , There are new reasons for buyback.

a) Do buyback instead of paying Dividend to avoid paying Taxes.

b) Do buyback to use company reserves for funding needs of Promoter / Government. (Instead of OFS)

I am writing this post on calculated risk  / Low risk Arb opportunity. Discussing on implication of Buyback with above rationale can be by another blog.

There are spate of Buyback happening in the Indian market by Private Sector companies and Public Sector companies. There is SEBI guidelines that Buyback from Small shareholders (Holding shares valued at not more than Rs 2 lacs) should be made as per there entitled share holding ratio or 15 % whichever is higher (Refer SEBI guideline linked above).

It is noticed that small shareholders may form more than 90 % to 95 % of the number of shareholders, but they may not hold more than 5% to 10% of the share capital. Also Higher the promoter holding, lesser will be holding of small shareholders in percentage terms.

It means the lesser the percentage of Retail shareholding, Higher will be the acceptance ratio in Buy back., Also there will be many long term investors, who would not want to tender the shares (Also sometime, they wont, if their cost of purchase is higher), which will further push up the acceptance ratio.

There will also be many big Investors, who would not participate in such arb trade, they may not be able to buy such quantity back from normal market without impacting prices. There will also be large investors, who would not participate in Buyback as Arb returns may be lesser than Tax impact on selling of shares.

Private sector companies like Wipro, Bharti Infratel, Novartis came out with Buyback, They are doing buyback of shares, but Promoters are also participating in buyback, clearly with an intention to get money from the company and in more Tax effective way.

Recently PSU like National Aluminum (Nalco) , MOIL and NMDC have declared Buyback, The Buyback seems done only to give reserves back to promoters (Government), participation by other shareholders in collateral.

But There is opportunity for small shareholders based on acceptance ratio. I will not calculate returns but try to calculate acceptance ratio.

I will discuss my rationale of Buyback opportunity in Nalco  below as they have already asked for Postal Ballot.

National Aluminum : Nalco is a profit making, dividend paying PSU, It has a dividend yield of almost 4 %, and trades at PE of 15. Its book value is around Rs 52/-. It has buyback of Shares at Rs 44/- (CMP 41.50).

We will look at share holding Data, to arrive at acceptance ratio.

No of issued Shares	2577238512
% of Promoter holding (GOI)	80.93
No of small shareholders	80998
Qty held by small shareholders	52809370
% of Qty by Small share holders	2.05
Total Buyback qty	644309628
% of Buyback	25%
BB Qty for Small Share holders	96646444
in Buy back
Fund holdings	313062101
Fund holdings %	12.15
Other Major Shareholders	59987235
Other Major Shareholders %	2.33
BB Qty for Goi	443223814.8
BB Qty for Other Share holders	104439369.2
Total Floating Stock	491455890
Total share by large share holding,
more that 1 %	265457683

From the above table, we can see that, there is high probability of 100 % acceptance ratio for small share holders, If it is bought now also, because The offer is to buy more than 9.66 crore shares and there are only 5.28 in that bracket. 

Also as LIC, Bajaj and Hindalco hold chunk of 26.54 crore share, which I feel will mostly not be tendered in Buyback. Also if we remove all Institutional shareholder and Share holder, the remaining float would be 118406554. Whereas Buyback qty is much more.

There can be change in acceptance ratio if Price falls, but then fundamental will come into play and many value buyers will enter the market to support the price. Also to qualify GOI have put its intention to tender 100 % qty of Buyback, (That may happen if price of Nalco move above 44 /-)

I will calculate acceptance ratio of other companies as and when they finalize their buyback QTY and Price, and send it for approval of shareholders.

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this company.

I welcome your critical comments and suggestions.

PS : I have some position in the stock, So I can be Biased