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

CapitalMind CEO Deepak Shenoy has questioned part of SEBI’s case against two entities accused of manipulating the newly introduced Closing Auction Session (CAS), arguing that placing buy orders at the highest permitted price or sell orders at the lowest permitted price is not, by itself, evidence of manipulation.

Shenoy said his view was limited to the allegations concerning the placement of extreme-priced orders, adding that he would reserve judgment on other aspects of the case until the entities had presented their defence.

What happened

Sebi on August 19 issued its first interim order over alleged manipulation of trades in the Closing Auction Session (CAS), highlighting potential vulnerabilities in the new mechanism introduced on August 3.

The case relates to August 13, when the SENSEX was set to settle weekly derivative contracts. SEBI named Copthall Mauritius Investment Ltd and Mansi Share and Stock Broking Pvt Ltd as noticees, alleging they used aggressive cash-market orders to influence the index and benefit their SENSEX options positions.

The SENSEX reference price was 77,829.60, but the index closed at 78,080. SEBI identified three sharp upward spikes, with the index rising 362.02 points, 132.67 points and 405.08 points in quick succession.

MUST READ: SEBI flags prima facie manipulation in Sensex closing auction session, blocks two entities

SEBI alleged that Copthall placed aggressive buy orders across SENSEX constituents, while Mansi placed large sell orders below the reference price. The regulator said most of the orders were cancelled within seconds.

SEBI estimated alleged wrongful gains of ₹2.96 crore for Copthall and ₹71.65 lakh for Mansi. It said the SENSEX would have closed around 77,840 based on equivalent Nifty 50 closing values.

The regulator ordered banks to impound the alleged gains, barred both entities from participating in the equity CAS and imposed restrictions on their assets and accounts. SEBI also clarified that there was no prima facie evidence that the two entities acted in concert.

Why extreme CAS orders can be legitimate

According to Shenoy, placing limit buy orders at the highest possible price, or sell orders at the lowest possible price, can be a logical strategy under the CAS mechanism. Such orders are designed to execute at the eventual equilibrium price rather than at the extreme price specified by the participant.

“The regulator might want to tone down the accusation that placing buy orders 3% above reference price is bad. No, it's the only way to try and guarantee execution,” Shenoy said.

He explained that every buy order placed at a higher price effectively represents willingness to buy at any price below it. During the auction, once market buy and sell orders offset each other, the remaining orders are matched by prioritising the lowest-priced sell orders against the highest-priced buy orders.

As a result, placing a buy order at the highest permitted level can give a participant priority in the queue while the eventual transaction still takes place at the CAS equilibrium price.

Shenoy questions interpretation of extreme orders

Shenoy also pointed out that such extreme orders are not necessarily unusual in the CAS. Market participants observing the auction, he said, would see many orders to buy at seemingly very high prices or sell at very low prices.

ALSO READ: SEBI bans JPMorgan unit over alleged market manipulation

He argued that this can be an inherent feature of the auction mechanism rather than evidence of an attempt to manipulate the closing price. The equilibrium price is ultimately determined through the interaction of buy and sell orders, rather than simply by the most extreme quotes in the order book.

His comments come after SEBI alleged manipulation during the CAS on August 13, the weekly SENSEX expiry. The regulator said the Indicative Equilibrium Price (IEP) showed three sharp spikes between 3:20 p.m. and 3:30 p.m., with the SENSEX moving up by around 360 points, 132 points and 405 points during the respective spikes.

SEBI takes interim action

SEBI subsequently took interim action against Copthall Mauritius Investment Limited and Mansi Share and Stock Broking Pvt Ltd, restricting their participation in the securities market and CAS, among other measures. The regulator has launched a detailed investigation into the alleged violations.

SEBI Chairman Tuhin Kanta Pandey has separately warned that attempts to manipulate or “defame” the CAS will invite strict action. He said the regulator can detect manipulation under CAS more easily than under the earlier volume-weighted average price (VWAP) system.

Cancellations remain a separate concern

Shenoy, however, distinguished order placement from cancellations. He said cancellations after a certain point in the auction could be problematic and suggested that India could consider restrictions similar to Hong Kong, where cancellations are not allowed during the final few minutes.

He said the remaining allegations should be assessed after the final order, particularly where the entities’ defence has yet to be considered.

MUST SEE: NSE plans to allow trading its shares on own platform: Report