- SEBI is reviewing Closing Auction Session trades for potential market manipulation signs
- The regulator is examining low liquidity and thin participation impacts on closing prices
- SEBI aims to assess if trades reflect genuine interest or intent to influence prices
The Securities and Exchange Board of India (SEBI) is reviewing trading activity during the first week of the Closing Auction Session (CAS) for possible signs of market manipulation, sources told NDTV Profit.
The market regulator has received trading data from stock exchanges and is examining transactions executed during the newly introduced closing auction mechanism, particularly in the context of the volatility witnessed after the CAS rollout last week.
Sources said SEBI is assessing whether trades during the closing auction may have influenced closing prices, especially in stocks where participation remained thin. The regulator is also examining whether low liquidity in the initial days of the new mechanism could make the closing auction more vulnerable to attempts to influence prices.
The review comes as market participants and analysts have raised concerns over the impact of limited participation on price discovery during the closing auction. With fewer trades taking place in some securities, relatively small orders could potentially have a larger impact on the final traded price.
According to sources, one of SEBI's key areas of assessment is whether any trading activity was aimed at influencing closing prices rather than reflecting genuine buying or selling interest. The regulator is also looking at ways to improve liquidity and participation in the CAS to ensure more efficient price discovery.
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However, establishing market manipulation could prove legally challenging, experts said. Low trading volumes or unusual price movements, by themselves, may not be sufficient to establish market abuse.
"In a newly launched system like CAS with minimal volume, there are bound to be price spikes because of limited number of sellers compared to buyers. This is because of practical issues with short selling. In such a market, those who buy in the day and sell in the CAS window cannot be called manipulators. Manipulation requires artificial price or volume," said Sandeep Parekh, Founder, Finsec Law Advisors.
He further added that it would be no exaggeration to say that the sellers are in fact deflating the artificial bubble created by the system and would thus be the opposite of manipulators.
For a transaction to qualify as manipulation, regulators would generally need to demonstrate an intention to distort the price or volume of a security, according to legal experts. Merely showing that a particular trade moved the closing price may not be enough unless there is evidence that the transaction was executed with the objective of creating an artificial price.
Experts said demonstrating the creation of an artificial price or misleading market conditions would therefore be critical if SEBI decides to pursue any enforcement action.
The initial review is also not necessarily an indication that SEBI has concluded that manipulation took place. Sources said the regulator is likely to examine the trading pattern over a longer period before drawing firm conclusions on the functioning of the CAS.
The Closing Auction Session was introduced to improve the price discovery mechanism at the end of the trading day. Under the system, eligible securities are brought into an auction process towards the close, with orders matched at a price designed to maximise the number of shares traded.
While the mechanism is intended to produce a more efficient and representative closing price, the initial days of implementation have brought attention to the importance of adequate liquidity and participation.
SEBI is therefore expected to focus not only on individual trades but also on broader market structure issues, including participation levels, order concentration and the extent to which trading activity during the auction affects closing prices.
Market participants are likely to closely watch the regulator's assessment as any changes to the CAS framework could have implications for institutional investors, traders and the broader price discovery process.
Sources indicated that SEBI is unlikely to judge the effectiveness or vulnerabilities of the CAS solely on the basis of its first few trading sessions. Instead, the regulator is expected to consider a larger data set to determine whether the mechanism is functioning as intended and whether additional safeguards are required.
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