‘Move in the right direction but timing probably not right’: Equirus Group’s trading head on CAS mechanism

The newly introduced Closing Auction Session (CAS) mechanism is a step in the right direction but was probably implemented too hastily by the Securities and Exchange Board of India (SEBI), according to Tejas Shah, director and head of trading at Equirus Group.

The mechanism, which was implemented at the start of this month and has been in the news since, is probably a move in the right direction, but the Indian market is “probably not a mature enough market for it”, Shah told Akash Mandal in an interview.

Excerpts: SEBI’s idea was to adopt a mechanism used in many developed markets, like the US and the UK, whereas in India, we used to calculate the average price over the last 30 minutes to derive closing prices. Now, especially after the Jane Street incident, SEBI realised that at times it is easy to tilt the VWAP system in your favour because if you trade a big quantity during the closing moments of the session, the previous 30 minutes would not matter that much in the VWAP system.

Many FIIs and global players also pitched that CAS would be a better mechanism to determine closing prices. So now, until 3:15 pm, there is normal trading. All pending limit and market orders are then carried forward to the CAS, while stop-loss orders are removed from the system.

Exchanges calculate reference prices from 3:15 pm to 3:30 pm. From 3:20 pm to 3:25 pm, you can place either market or limit orders. From 3:25 pm, you can only place limit orders, and the session ends at a random time between 3:27 pm and 3:30 pm.

Market orders help execute orders faster at the prevailing market price, while limit orders focus more on price than certainty of execution. Derivatives continue to trade until 3:40 pm. It is still evolving, so it would be very difficult to compare the two.

But the participation level and price discovery become more democratic than when someone could tilt the price at the end. Rather than having your order match with the closing price and being dependent on it, you can now participate and place orders at a higher or lower price, based on your requirements.

So, you have that flexibility. It is something new that people have still not adjusted to. Also, whenever there is a change in a financial market, we see people first thinking it over and playing it out with caution rather than jumping into it.

What is happening is that the price-matching mechanism that operates for 5-7 minutes during the CAS is happening behind the scenes. So, you are not aware of the price at which your order is going to match. Volumes are thin because people are still working out the probabilities around that blind spot.

If I put an order for a particular quantity of a stock at a price 2% higher, it does not give me certainty about whether the entire order will be executed or whether I will find a match at the price I want. There is a higher chance that you would get under-executions, where only part of your order is executed.

Volumes are often driven by bigger players. All these players, such as arbitrage firms and prop (proprietary trading) firms, are sitting out currently because the new system is not allowing them enough time or visibility to hedge in the F&O market, and they do not run unhedged positions.

So, the participants that are more active in generating volumes are currently sitting on the sidelines because of their own limitations. What caused the wide divergence initially seen in the closing prices of the Nifty 50 and Sensex when the system was introduced?

Can it be seen as bigger players gaming the new system? That notable divergence was only seen for the first 2-3 days. Because everybody feared the unknown, nobody knew what to do. Everyone, including the exchanges and the systems, was operating on that thin line of preparedness.

I would not see it as big players gaming the system because ultimately everybody has the fear of the regulator. So, it is not about gaming the system; it is more about liquidity and impact cost. If I am running a position that needs to be squared off, I need to square it off.