CAS sparks trader backlash as losses mount, Sebi holds firm
Mumbai: The newly-introduced closing auction system (CAS) has drawn sharp criticism from traders, who are irked by the unpredictability of recent index and stock price
Mumbai: The newly-introduced closing auction system (CAS) has drawn sharp criticism from traders, who are irked by the unpredictability of recent index and stock price moves and the resulting losses.Calls for changes to the mechanism or, even a temporary rollback, have gathered pace on social media, prompting the Securities and Exchange Board of India and exchanges to convene a meeting with top brokers even as the authorities defended the framework.The regulator is believed to have told brokers that it has no plans to change the CAS for now and urged them to encourage more traders to participate in the mechanism. An email sent to Sebi went unanswered till the time of going to printAt the centre of the controversy is the regulator's decision to overhaul the way closing prices of 200-odd stocks in the futures and options (F&O) segment are determined, which traders say has caused unusually wide divergences between Sensex and Nifty and futures and options trades going awry."The biggest problem under the CAS is that traders are unable to understand what the closing prices will be because there is a lot of randomness in the system," said Piyush Chaudhry, founder of Mumbai-based Wave Analytics.Professional traders use factors such as order flows, liquidity, derivatives positions and historical trading patterns to estimate price directions-key to successful trading.
Sharp deviations from those expectations can cause trading strategies to misfire, resulting in unexpected gains or losses.Options traders have taken the biggest hit in the closing auction system. For traders like Aakanksha Gupta, the closing auction mechanism has put her in a blind spot as she is unable to assess where the Nifty is likely to close."As an options seller, I rely on the live Nifty spot level to execute trades throughout the day. Since CAS was introduced, cash market trading ends at 3.15 pm, but the F&O eligible stocks continue to trade," said Mumbai-based Gupta, a Sebi-registered research analyst. "We build strategies around the prevailing spot level, only to find the index repricing sharply when trading resumes, turning profitable positions into losses.Both indices have witnessed rollercoaster rides in the past three days. On Wednesday, the Sensex was down 0.2% and the Nifty had fallen 0.5% at their intraday lows. At close, the Sensex ended 0.19% higher, while the Nifty closed almost flat."Over the past two days, we've seen a significant gap between the reference price during the CAS and the final indicative closing price, because large orders can influence the indicative price," said Aditya Pachwaria, founder, Fintoric Capital.Wild SwingsShikha Pruthi Gupta, a Faridabad, NCR-based full-time trader, said a profitable trade at 3.15 pm can unexpectedly turn into a loss because of the lack of visibility into where the index will finally settle.One key criticism voiced by traders is the 3% price band within which the auction price is generally allowed to move, measured on the basis of the stock's average traded price between 3.00 and 3.15 pm."How can you have a +/- 3% range for stock prices in the auction process; that itself is a random number and has no connection to what the market's behaviour was for the day," said Chaudhry.
The BriefWire