Sebi Chairman Tuhin Kanta Pandey has publicly defended the new Closing Auction System amidst market turbulence, asserting its transparency and acknowledging that the industry requires time to fully grasp the structural reform.
Key Points
- Sebi Chairman Tuhin Kanta Pandey defended the Closing Auction System (CAS), calling it transparent and stating that the industry needs time to adapt to the new mechanism.
- The CAS, rolled out on August 3, faced initial issues with sharp stock price movements, leading to concerns over closing price reliability and limited participation from some fund houses.
- Pandey highlighted that mutual fund participation in CAS has increased from 5-7 per cent to 20-25 per cent, and the regulator is taking stakeholder inputs for potential tweaks.
- The CAS is considered a structural reform to reduce manipulation risk in closing prices and minimise tracking errors for passive funds, aligning India with global counterparts.
- Mutual funds suggested allowing continuous trading alongside CAS, T+2 settlement for CAS trades, and an efficient Stock Lending and Borrowing Mechanism (SLBM) for better functionality.
Making his first public statement a week after the rollout of the Closing Auction System (CAS) that led to some turbulence in the stock market, Securities and Exchange Board of India (Sebi) Chairman Tuhin Kanta Pandey on Wednesday called it a transparent system and said it takes time for the industry to understand when a change is made.
Under the CAS, exchanges collect buy and sell orders after the regular session ends and match those orders at a single price where the maximum number of shares can be traded. Some fund houses have not participated in the CAS due to uncertainty around the closing price.
The new system, which was rolled out on August 3, faced issues in its initial days, with sharp movements in stock prices during the auction, raising concerns over the reliability of the closing price.
Addressing Market Concerns
Pandey said the regulator has been taking inputs from stakeholders as it looks to address their issues.
"We are taking suggestions. Whenever there is a change, it takes time for the whole industry to understand."
The chairman added that mutual funds' participation in the CAS has surged from 5-7 per cent to almost 20-25 per cent now.
He added that participation from proprietary traders is seen more around the expiry dates.
"If there is a need to tweak and improve it, then we will look into that also.
"But right now, our problem is that there is a lack of understanding because historically algos and other players have based their models on the old mechanism," Pandey said.
"We have to be watchful, but we should be persistent."
Structural Reform and Global Alignment
Calling the CAS a structural reform, he said India had been a laggard on this front.
"Most of our global counterparts have already done it — like the US, Germany, Japan, Hong Kong, and Australia."
Pandey said it is important to have one price for the net asset value (NAV) of passive funds.
There was a risk of manipulation in the earlier framework towards the close of trading, with the last few minutes having a disproportionate impact.
"Also, it was structurally important to reduce the tracking error for passive schemes," he added.
While clarifying that Sebi had not observed any manipulation, he added that data is being analysed.
The Sebi chairman said that major brokers, or those falling under qualified stock brokers list, have either started showing indicative prices or will start providing it by August 14.
"The indicated prices are still mandated. It is not a blackbox and prices at which bids are coming are being shown.
"This is just a consolidation. Random close has been kept so that there is no last minute trade impact," he noted.
There is a need to increase the participation and understanding about the mechanism, he said.
"CAS is a transparent mechanism and the pricing is visible."
Meeting with Mutual Funds
The Sebi held a meeting with mutual funds on Tuesday to understand the reasons behind their limited participation in the CAS, according to people familiar with the matter.
The meeting, which was attended by senior fund managers and traders from fund houses of varying sizes, participants discussed the practical difficulties presented by the new mechanism and ways to make it more efficient, the sources said.
One suggestion made by the MF players was to allow continuous trading to run alongside the CAS.
Fund managers also suggested that CAS trades be settled on a T+2 (trading day plus two days) basis, giving them flexibility to manage the positions the next day if trade does not go as expected.
They also stressed the need for an efficient Stock Lending and Borrowing Mechanism (SLBM), which they said would be crucial for the CAS to function effectively.
While some people on social media called for a no trade day on Wednesday, brokers noted that there was no impact.
"Such call-offs for trades usually made an impact when there was an outcry system.
"Now, the system is decentralised and the participation is much wider," noted a broker.
