Shares of capital market stocks jumped up to 4% on Tuesday after a report said market regulator Sebi may partly reverse some rules related to the Closing Auction Session (CAS), which has led to sharp volatility in Sensex and Nifty since its inception in August.

The Securities and Exchange Board of India (SEBI) will likely stop using closing auctions to calculate derivatives settlement prices for at least one year and instead use the volume-weighted average price of the last 30 minutes of trading to determine the derivative pricing, people familiar with the matter told Reuters. This would mark a partial reversal of the new mechanisms introduced to set closing prices of key stocks and derivative contracts.

The report added that the closing auction will still be used to determine the end-of-day price for underlying stocks in the less liquid cash market. The market regulator will likely announce these changes by the end of this month, the report further said.

Also read | Sebi to partly reverse derivative settlement rules after pushback: Report

Sebi receives feedback on consultation paper on CAS

This comes after Sebi during the weekend said it received 20,000 comments on its consultation paper seeking views on proposed changes to CAS, market timings and the settlement methodology for derivatives contracts. Sebi had proposed to stop publishing the indicative value of an index and publish only the indicative prices of individual stocks during the 10-minute CAS window, arguing that the index value was still being determined.

However, Reuters reported that Sebi received feedback that sophisticated trading desks could reconstruct those values independently and removing them would reduce transparency without addressing manipulation concerns. While Sebi agreed with the feedback, it would push for greater awareness among investors that the underlying index price is only determined at the end of the 10-minute window, the report added.

Stock exchanges introduced the new CAS system from August 3, changing the way closing prices are calculated for stocks included in the futures and options (F&O) segment. Under CAS, continuous trading in stocks that also have F&O contracts ends at 3:15 pm. However, this does not mean these stocks are closed for the day 15 minutes before the broader market shuts.

From 3:15 pm onwards, these stocks move into the CAS, a 20-minute auction process that runs until 3:35 pm to determine their official closing prices. Meanwhile, stocks that are not part of the F&O segment continue to trade as usual until 3:30 pm.

During the 20-minute auction window, buy and sell orders for eligible stocks are collected and matched at a single equilibrium price. This mechanism is aimed at improving price discovery and reducing the impact of last-minute trades on closing prices.

CAS issues easing?

Meanwhile, Jefferies said the impact of the recently introduced closing auction session (CAS) may finally be easing on Dalal Street, with issues around the new mechanism appearing to settle. The brokerage noted that options volumes improved in September after a sharp drop in August.

The international brokerage said industry-wide September index options premium ADTO stood at Rs 68,100 crore, broadly similar to July levels before CAS was introduced on August 3. Jefferies said the recovery to pre-CAS levels was largely driven by easing CAS-related issues and a spike in the VIX. The brokerage named Groww, MCX, KFIN and Nuvama as its top capital market picks.

Also read | CAS chaos eases? Jefferies names top stock picks as options volumes recover, IPOs and commodities gain traction

Capital market stocks rally

BSE shares jumped nearly 4% to trade at Rs 3,292 apiece on Tuesday morning. The newly-listed shares of its rival NSE rose more than 2%.

Groww shares jumped over 3%, while those of Angel One were up nearly 3%.

Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.