Sensex CAS manipulation: Thin liquidity exposes vulnerability; what's ahead?

CAS manipulation: SEBI's ban on JPMorgan unit Copthall Mauritius Investment and domestic brokerage Mansi Share and Stock Broking over alleged manipulation of the Sensex closing price on August 13, a weekly expiry day, has put the spotlight on thin liquidity on BSE during the new Closing Auction Session (CAS).

While CAS was introduced on August 3 to improve price discovery and make closing prices more transparent and representative, experts noted that the effectiveness of any auction-based mechanism ultimately depends on the depth and diversity of participation. August 13 exposed the issue. 

To recall, NSE recorded closing auction turnover of Rs 1,276.20 crore on August 3, the first day of CAS. BSE's turnover on that day was Rs 10.8 crore. The Sensex closing price, like that of other indices, serves as the settlement benchmark for weekly options contracts involving thousands of crores in transactions.

A relatively small amount of trading activity can influence an official closing price that subsequently feeds into index and derivative settlement, said Pradyun Chakravarty, partner at King Stubb & Kasiva, Advocates and Attorneys. 

He said the sharp disparity between NSE and BSE auction turnover on the first day of CAS had highlighted the potential vulnerability of the price-setting mechanism.

Chakravarty said this becomes particularly significant when the notional value of derivatives linked to the benchmark is substantially larger than the cash-market activity that establishes the underlying closing price.

"In such circumstances, even a relatively small price movement in a few index constituents can have an outsized economic impact on derivative positions. That does not, by itself, establish manipulation, but it creates a clear incentive for regulatory scrutiny," he said.

What happened on August 13 SEBI surveillance on August 13 flagged abnormal spikes in the Sensex's indicative equilibrium price. The concerns were related to the Sensex's recovery of 113.61 points and sharp movements in options. There were three substantial price spikes and one gradual drawdown during the CAS.

The Sensex's indicative equilibrium price increased by 362.02 points in two seconds, followed by a 132.67-point rise in 12 seconds and another 405.08-point increase in 28 seconds. Besides, it was observed that during the interval from 3:21 pm to 3:26 pm, the BSE Sensex exhibited  a  general  downward  trajectory,  declining  from 77,991.05 to 77,893.61. This drawdown  was intermittently interrupted by one of the aforementioned price spikes, which caused a temporary deviation from the  prevailing downward trend in this period.

It was subsequently noted that 86.6 per cent of the gross buy value was traded by a single entity, Copthall Mauritius Investment Ltd. Copthall cancelled the highest number of buy orders, worth Rs 98.11 crore. The entity cancelled 10,38,201 shares out of an order quantity of 31,66,651, translating into a cancellation rate of 32.79 per cent.

Mansi Share and Stock Broking Private Ltd cancelled the highest number of sell orders. The entity cancelled 12,65,000 shares out of a total sell order quantity of 12,77,000, a cancellation rate of 99.06 per cent.

SEBI said the nature of the buy concentration, order placement and order cancellations by the entities warranted a detailed examination of the orders placed and their impact on the Sensex's indicative equilibrium price on August 13, 2026.

SEBI's interim order Following the investigation, SEBI in its interim order banned the two entities from the market and ordered impounding of ​total of Rs 3.68 crore ($384,324) from the banned firms.

Read more: CAS manipulation case: Deepak Shenoy questions SEBI’s take on high-priced orders  

BSE management on CAS

Nirmal Bang said it had hosted the management of BSE represented by Sunil Ramrakhiani, Chief Business Officer, at its Investor conference on August 10. It said the management highlighted the disconnect that can arise between the underlying cash market and derivative prices during the closing auction.

"Since derivatives derive their value from the underlying, an artificial or thinly traded cash market closing price can influence option/futures pricing even when that price does not represent genuine market equilibrium. The issue becomes particularly important during the final minutes of trading, when participants may rely on screen prices without fully understanding whether those prices reflect actual underlying demand and supply," it said.

Nirmal Bang said greater alignment between cash-market and derivatives-market closing mechanisms should improve price discovery and reduce distortions, but implementation could require further regulatory changes.

BSE derivatives

The implementation of the CAS mechanism has introduced structural friction for proprietary and high-frequency traders, leading to a 12 per cent drop in options ADTV for BSE in August. This headwind compounds the impact of the elevated STT structure and tightened RBI bank guarantee norms, Nirmal Bang Institutional Equities said.

Nuvama in a note earier this week said BSE's derivatives franchise has historically been comparatively thinner, noting that institutional participation in BSE's order book was comparatively lower before CAS.

"We flag a liquidity maturity mismatch: Post CAS volumes are coming in soft and has stayed soft with BSE contracts trading at an average of 104mn last week versus 150mn in Jul-26, with market commentary explicitly flagging that price discovery is yet to stabilise," it said on August 17.

With the closing reference price now subject to potential dislocation within the ±3 per cent auction band, and the timing of the equilibrium print within the 3:15–3:35 pm window inherently less predictable, option sellers who rely on smooth and predictable time decay into expiry are facing fat-tail closing risks that they cannot hedge in the same way as under continuous trading, Nuvama said.

"The market already points to collapse in open interest, implying a sharp retreat of market-making and options liquidity providers, not just directional traders. Uncertainty around the close keeps premiums inflated, which at close leads to big swings in option prices," it said.

Low participation

Earlier, in a post on X, Nithin Kamath of Zerodha noted that India has more than 13 crore registered investors, but only about 20–30 lakh traders are active on any given day. He said India does not have a large enough committed ecosystem providing two-sided liquidity across the cash market, futures, ETFs and closing auctions.

Kamath said closing auctions work well when there is deep liquidity and a large, diverse ecosystem of market participants, including market makers and arbitrageurs. Whenever prices diverge between the cash market, futures, ETFs or different exchanges, participants step in and arbitrage away those differences.

This ability to arbitrage is much more limited in India, Kamath explained.

What SEBI Chair says

Amid the uproar, a social media campaign even encouraged traders to refrain from placing orders on August 12. SEBI chairperson Tuhin Kanta Pandey later suggested that CAS is here to stay.

Pandey said SEBI has been engaging with stakeholders and monitoring feedback on the mechanism. "If there is a need to tweak it and improve it, we will also see that," he said.

"We have to be watchful, but we should be persistent. We should see that everyone understands the market," Pandey added.

Close monitoring

The events surrounding the August 13 Sensex expiry underline this concern. SEBI's subsequent interim action, alleging that orders were used to influence constituent prices during CAS, demonstrates why liquidity, order concentration, cancellation patterns and the relationship between cash-market positions and derivative exposures need to be closely monitored.

The regulatory challenge, therefore, is not necessarily whether CAS should exist, but whether the auction has sufficient participation and safeguards to ensure that the closing price cannot be disproportionately influenced by a small number of orders, Chakravarty said.

What's ahead?

"Going forward, the credibility of CAS will depend on strengthening surveillance around expiry days, improving participation and ensuring that the price-setting volume is sufficiently representative of the broader market. The objective should be to ensure that the official closing price reflects genuine market equilibrium rather than becoming a relatively low-cost lever for influencing much larger derivative exposures," he said.