India's Closing Auction Session Needs Stronger Brakes to Prevent Index-Level Price Manipulation

The Quick Take

• SEBI may introduce tighter CAS safeguards that raise compliance costs for high-frequency traders exploiting auction-close gaps
• Index-linked ETF and futures pricing accuracy improves if CAS manipulability is reduced, reducing tracking error for passive investors
• SEBI circular on CAS rule amendments expected after Jimeet Modi's public critique gains regulatory attention

India's Closing Auction Session, which was introduced to improve price discovery and reduce end-of-day volatility, has exposed a structural gap: orders can be cancelled right up until the auction closes, creating a window that sophisticated participants have exploited to create sharp price swings. Economic Times Markets columnist Jimeet Modi argues that this design flaw undermines the very goal the mechanism was meant to achieve, since allowing cancellations until the last moment enables gaming that distorts settlement prices at the index level. The problem is amplified on derivative expiry dates when futures and options settle based on these potentially manipulated closing prints.

The proposed remedies centre on locking in orders earlier in the auction window, deepening liquidity through broader market-maker participation, and improving monitoring of coordinated order cancellations. Modi's analysis draws on international precedent from markets including Australia and Hong Kong, where auction safeguards are more robust, arguing that India imported the auction mechanism but not the accompanying protections. The issue has regulatory relevance given SEBI's ongoing scrutiny of market microstructure and its track record of implementing reforms relatively quickly when systemic vulnerabilities are clearly identified and publicly documented.

For institutional investors, the concern is primarily around Nifty 50 index settlement prices on options expiry, where even small manipulations can have large P&L consequences across the derivatives stack. The article's publication through a high-credibility platform like Economic Times Markets ensures the argument reaches SEBI officials and market participants simultaneously. If regulatory action follows, the short-term impact would be felt by strategies that currently exploit the cancellation window, while the long-term benefit would be greater settlement price integrity for all participants. A SEBI consultation paper on CAS reforms is increasingly likely within the current regulatory cycle.

Synthesized from 1 source.