The most dangerous words in regulation are sometimes not “we were wrong”; they are “we can fix it”. They sound responsible. But there comes a point when fixing a decision becomes a way of avoiding the more uncomfortable question of whether the decision itself should survive.
SEBI’s handling of the Closing Auction Session (CAS) is beginning to approach that point.
CAS And Its Stated Goals
CAS went live on August 3 after considerable development. Its stated goals were better price discovery and allowing investors to trade at the closing price. The proposal leaned heavily on the fact that major international markets use closing auctions.
But “used elsewhere” is not the same as “proven effective for India”.
There is no public evidence that SEBI empirically showed, before launch, that CAS would produce a better closing price than the 30-minute VWAP it replaced. No Indian study, simulation or counterfactual demonstrated improved price discovery, lower volatility or reduced vulnerability to strategic trading.
CAS appears to have begun as an assumption “that a developed-market mechanism would improve India’s closing process”. Empirical validation was left for later.
India’s Distinct Market Structure
India’s market structure is different—large retail participation in derivatives, distinctive expiry-day dynamics, and a shallow securities lending and borrowing market. SEBI itself has noted limited SLBM participation and is exploring ways to revive it. A mechanism that works in New York, London or Hong Kong is not automatically suitable for Mumbai. Regulatory architecture cannot simply be imported as global best practice.
The real test began when the market lived with CAS.
On August 13, unusual trading during CAS on Sensex expiry day led SEBI to issue an ex-parte interim order, alleging manipulative trades and impounding gains. Alleged manipulation alone does not prove CAS is defective, but it raises the need to examine whether CAS creates different incentives or vulnerabilities from the system it replaced.
SEBI’s September 12 consultation paper notes that derivatives activity remains concentrated around the close. According to the paper, the average premium traded per minute during CAS was higher than in the pre-CAS period, though the sample of five expiries cannot establish causation, a limitation SEBI itself records. There is still no public study showing that shifts in volumes or retail behaviour were caused by CAS. SEBI also records significant derivatives activity in the five-minute transition, with participants relying on the evolving, unexecuted Indicative Equilibrium Price.
Making CAS Work Or Rethinking It
What does SEBI propose? Not to ask whether CAS should continue.
The paper instead offers changes to settlement methodology, market timings, the transition period, dissemination of indicative values, and order modification rules. Collectively, these show the direction: how to make CAS work better, not whether it should survive.
On derivative settlement, one proposed option blends the last 30 minutes of continuous trading with the 10-minute CAS. The other temporarily restores the pre-CAS method but is framed only as an interim step towards the blended approach. The destination appears already chosen.
In August, the SEBI Chairman said CAS was “here to stay”, while examining constraints and improvements.
This pattern resembles a classic case of escalation of commitment—introduce the mechanism. When problems appear, modify settlement. Shorten the transition. Change displayed information. Tighten order rules. Each step can be defended individually; together, they create a protective shell around the original decision. The regulatory question shifts from “Is CAS working?” to “How do we make CAS work?”
Those are not the same questions.
The Need For An Empirical Test
CAS was meant to improve price discovery. The fundamental test is whether it produces a better closing price for India than the old methodology. That is an empirical question.
SEBI should now conduct the neutral assessment that should have preceded the launch, covering volatility, liquidity, spreads, market depth, cancellations, institutional and retail participation, expiry behaviour, settlement effects and abnormal price movements, and answer the counterfactual: what would these metrics have looked like under continued 30-minute VWAP?
The evidence may support CAS, modifications, or a return to the old system. A regulator must be equally open to all three.
What is missing is a public analysis, showing that CAS is less vulnerable to strategic influence than VWAP, that a mechanism designed for different participant mixes and deeper lending markets can be transplanted here, or that post-August market behavioural changes are caused by CAS.
Avoiding Escalation Of Commitment
The sequence looks like this: first decide CAS is the future, then identify the problems, and then redesign the architecture to preserve the original choice. The decision regarding the suitability of CAS itself has already been made.
SEBI should apply to itself the discipline it expects from investors. A trader who keeps averaging down because too much is already invested is exhibiting escalation of commitment. A regulator that keeps modifying a framework for the same reason risks the same error, with public confidence at stake.
Regulatory credibility comes not from defending yesterday’s decision with greater ingenuity but from showing that a decision can be abandoned when evidence no longer supports it.
Evidence Should Decide CAS’s Future
The September paper should not merely repair CAS; it should genuinely examine whether CAS deserves to remain at all. Otherwise, consultation becomes consultation after commitment.
SEBI does not owe CAS a future; it owes the market an open mind.
If evidence supports CAS, retain it. If parts fail, redesign them. If the previous mechanism served India better, restore it. There is no embarrassment in changing course. The greater institutional failure would be to keep repairing a mechanism simply because admitting a flawed premise has become uncomfortable.
The real test of regulatory maturity is not whether SEBI can make CAS survive; it is whether SEBI will let the evidence decide whether CAS deserves to survive.
The writer is a retired IRS officer and Ex-Chief of Surveillance at SEBI. Advisor to corporates, market participants and tech entrepreneurs.
