How traders allegedly gamed CAS

**Shashank** (0:01)
Hello folks, you're tuned in to Finshots Daily. I am Shashank, your host of this podcast. After an incredible two years of hosting the Finshots Daily podcast, the time has now come for me to step back and pass the mic to our new host Saad. I want to take a moment to express my deepest gratitude to all of you who tuned in day after day. Your support and engagement have meant the absolute world to us and made this journey unforgettable. I also need to give a massive shout out to Suman and Pradyumna. They are the brilliant writers behind the scenes along with Monish as well. And getting to narrate the fantastic stories they craft every single day has been a true privilege. Now, while I am stepping away from the host chair, the podcast is in excellent hands. Saad is going to do an amazing job taking things forward, and I really hope you will continue to show him and the show the exact same love and support you have always shown me.
Keep listening, and thank you again for everything. So folks, in today's episode, we talk about the downsides of Closing Auction Session, or CAS, and explore whether Indian stock markets can keep manipulation at bay.
But before we begin, here's a quick note from Dean Ditto. This weekend, we're hosting a free two-day insurance masterclass that helps you build real financial security by understanding health and life insurance, the right way. Well, the masterclass is completely free, and you can head to the link in the description to register while your seats last.
Okay, let's start with the story.
Exactly two weeks ago, when the Closing Auction Session mechanism kicked off in the stock market, we told you that we had already written about it a year ago, so we'd skip another story on it. Well, but maybe destiny had other plans, because just the day before yesterday, market regulator SEBI pulled up two companies, Kopthal Mauritius Investment Limited and Mansi Share and Stock Broking, for allegedly manipulating the Sensex's closing price during the CAS and seemingly minting 3.68 crore rupees from it. So, let's understand what happened and whether CAS really is the will and everyone thinks it is. Until July this year, a stock's official closing price was calculated using the average price of all trades in the last 30 minutes of the trading day. Now, starting this month, SEBI replaced that system with the CAS. Here, regular trading stops at 3:15 pm for stocks with F&O contracts, then a separate 20-minute auction runs until 3:35 pm, much like the pre-open session used to set opening prices. During these 20 minutes, traders get specific 5-minute windows to place or modify orders. The exchange then pulls all the buy and sell orders and finds an equilibrium price or simply the price at which the maximum number of shares can change hands. You can read about this in more detail with the article that we wrote. And I will link that in the description. And that becomes the official closing price, which is then used to calculate index levels, settle F&O contracts, and determine mutual fund NAVs. This is what paved the way for the alleged manipulation last week. Last Thursday was the weekly expiry of Sensex options. So the CAS closing level that afternoon directly determined how much traders made or lost on those expiring contracts. And because Kopthal and Mansi held options positions that would gain if the Sensex moved in their favor, SEBI alleges that they tried to influence that closing level. So how did they do it? Let's start with Kopthal, a Mauritius-based foreign portfolio investor linked to JP Morgan Chase. During the first two seconds of the CAS, Kopthal placed 32 large buy orders across all 30 Sensex stocks worth about 66 crore rupees. And these weren't ordinary buy orders. They were placed almost exactly at the maximum price allowed under CAS. What's even more interesting as well as suspicious is that Kopthal alone accounted for 99% of the total buy order value during those two seconds. That was enough to push the indicative Sensex level up by 362 points almost instantly. And Kopthal apparently did this not once or twice, but thrice. During the second and third spikes, it again flooded the market with aggressive buy orders accounting for 96% and 85% of all buy orders respectively. Then once the price had moved up, it cancelled its latest batch of buy orders. Now, if you're wondering why, well, Kopthal held a combination of option contracts that would benefit if the Sensex closed higher. So Sebi believes it used aggressive buying in the underlying Sensex stocks to push the index up and improve the profits it made from those options. Mansi, meanwhile, played the opposite game. It had bought Sensex options that would benefit if the index fell. So between 321 PM and 325 PM, it placed sell orders worth about 145 crore rupees across eight Sensex stocks, often at prices 1.5 to 3% below their reference prices. Now, that's the price used by the exchange as a starting point for calculating the indicative closing price during the auction. This kept the Sensex level artificially lower for about 5 minutes. Then, within just 3 seconds, Manzi cancelled almost all those orders, pulling the index down by nearly 233 points. That apparently helped Manzi exit its put options at a profit instead of letting them expire worthless. Which tells you that both players seem to have exploited the CAS to benefit their own option positions. But wait, wasn't CAS introduced to prevent precisely this kind of manipulation? So, how did this happen? And does it mean CAS itself is a bad idea? Well, everything has its downsides, and CAS is no exception. As you've seen, CAS pulls all orders into a single 15-20 minute window with far fewer participants than a full trading session, and uses them to find one equilibrium price. Unlike the old VWAP method, which averaged thousands of trades over 30 minutes, a call auction's single closing price can be heavily influenced by just one or two large participants if genuine competing orders are scarce. That's exactly what Sebi found in the Kopthal case, where one entity accounted for 85-99% of the buy order value during the spikes that moved the Sensex. There's another problem too.