The Dominoes Waiting to Fall.
SEBI’s stated mission is investor protection. Its revealed practice, across every structural intervention this series has examined, is the management of loss allocation, a management that consistently places the burden on those least equipped to bear it. That is to say, retail investors.
Does SEBI desire to exclude retail participation from Indian markets, entirely? It may not be the stated objective but it certainly appears to be the result of its actions.
The genesis of regulation of financial contracts started with the Securities Contract Regulation Act discussed in Chapter 1. If SEBI eases retail investors out of structural avenues of speculation in the financial market, what does it think will happen?
People will not just fold up and start keeping money in their banks. Trading will go underground. Half of the commodities trade is underground already and the regulator can do nothing about it. It is visible in every market, but there is no method to prove this assertion.
We are living in an era of internet and globalization. It is not very difficult to switch markets entirely. In which case, not only will trade be lost, but the Government will also lose its revenue stream. It can continue to increase STT or Securities Transaction Tax and be pleased with itself, but the goose that lays the golden egg may not be around for long.
The Irony of the Bhasmasur Solution
There is a story of Bhasmasur. He received a boon that turned everything he touched to ash. He had become too powerful. So Vishnu took the avatar of Mohini and performed a dance. Bhasmasur danced with her. In the course of the dance, he tried to touch his own head and was destroyed.
It is for the SEBI to decide what it is doing and why? Because SEBI’s regulatory philosophy carries a similar internal contradiction.
The CAS was introduced because the old VWAP-based close was being manipulated by large players. The manipulation worked by concentrating disproportionate capital in a thinly liquid market. SEBI did not review the extent of liquidity participation of one player. It did not look into dangerous cocktail of mixing derivative trade with huge cash market exposure. It decided to put gasoline on fire by introducing the CAS.
The CAS has consistently produced closing prices that no ordinary participant could have traded at. It operated through a mechanism with reduced participation from those who had already managed their day-session positions. It moved the official close well away from where continuous trading had left it.
The tool to prevent closing-price distortion created closing-price distortions on all days after its launch.
Jane Street used large capital concentrated in the last hour of continuous trading to push index prices to a desired settlement level. The CAS auction uses pooled institutional orders in a 15-minute window to generate aggregate prices that move the official Nifty far away from its last continuous-session level.
SEBI replaced one price-dislocation mechanism with another. The new one has SEBI’s own imprimatur on it, which makes it significantly harder to challenge.
The Retail Casualty Count
Retail traders faced multiple simultaneous problems, all created or worsened by the CAS.
The early square-off: Intraday cash positions had to be squared off by 3:05 PM, ten minutes earlier than before. Traders managing positions near their targets or stop-losses in those final minutes had no recourse.
The cancelled stop-losses: Stop-loss orders, GTT orders, and iceberg orders were all cancelled at the 3:15 PM transition. A retail trader who had placed a protective stop-loss had that protection stripped away with no action required on their part and no guarantee of prior awareness.
The frozen screen: Between 3:15 PM and 3:35 PM, the live price feed showed an Indicative Equilibrium Price, not a Last Traded Price. Retail trading is built on continuous price feeds and bid-ask visibility. The CAS substituted a mechanism that retail does not understand and cannot act against in real time.
The expiry-day settlement trap: On August 4, the CAS determined settlement prices for expiring options in a thin, post-session auction. A put option worth Rs. 100 at 3:24 PM expired worthless. A call option that appeared nearly valueless surged five-fold. These outcomes bore no relationship to where the continuous market had been pricing the underlying for the entire trading day.
The NAV dislocation: Retail investors in mutual funds tracking the Nifty had their August 3 NAVs computed against a closing level the continuous market never reached.
The bifurcated reference price: The divergence between NSE and BSE auction prices means that the same investor’s portfolio may be valued differently depending on which exchange’s CAS their stocks participated in.
None of these outcomes were announced to retail traders with adequate specificity. The information existed in SEBI circulars and broker advisories. The operational reality was a frozen screen, cancelled orders, a closing price 150 to 194 points above the last traded level, and options expiring against prices never seen in continuous trading.
Technical Analysis
Open, high, low, and close prices are the four pillars on which the entire edifice of technical analysis rests. The opening prices of India’s bourses were always suspect after the introduction of pre-open sessions. Now, closing prices are also artificially generated. This causes traditional tools of technical analysis to collapse.
When daily closing prices are manufactured in a post-session auction, classic trend indicators, such as the 50-day and 200-day Moving Averages, are distorted by artificial numbers. A 150-point CAS jump can trigger a false technical “breakout” above a key resistance level, tricking swing traders into bullish positions for a market that never traded at those levels during the continuous session. Similarly, daily candlestick wicks and bodies no longer reflect genuine buyer-seller consensus, turning reversal patterns like Dojis, Hammers, and Engulfing candles into unreliable signals.
Furthermore, momentum indicators like RSI, MACD, and Bollinger Bands rely on continuous price velocity. Injecting a synthetic 15-minute auction price at 3:35 PM breaks the mathematical continuity of these calculations. Charting platforms and algorithmic traders are now forced to analyze two disconnected datasets: the real continuous session ending at 3:15 PM, and the artificial settlement close post-3:35 PM. When the raw inputs of price and volume are corrupted at the close, traditional technical indicators output noise rather than signal.
Of course, new tools will be built. Technical analysts will ensure that. It was long overdue. The transition from hand-drawn Japanese candlesticks to computer-generated charts was a long journey. In the era of automated, algorithm-driven trading, old tools are outdated and new tools will be necessary. But a collapse so sudden creates severe challenges in the short run.
Bottom Line
SEBI will not acknowledge the fundamental problem because the fundamental problem is embedded in the design itself.
The NSE has already confirmed the obvious that the observed movements are not a glitch. They are the system working as intended. This confirmation forecloses the possibility of a technical fix.
SEBI has done a disservice which will reveal a pattern in the long run. Initially, there shall be an increase in trading volume due to uncertainty. SEBI has done well to discourage retail investors, but they could not bar them from participation entirely. Hence, these measures are being taken to ensure that only institutional players remain in the market.
There is no other possible conclusion.
References:
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Murphy, John J. (1999): Technical Analysis of the Financial Markets, New York Institute of Finance.
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Nison, Steve (2001): Japanese Candlestick Charting Techniques, Alpha Books / Penguin.
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Wilder, J. Welles (1978): New Concepts in Technical Trading Systems, Trend Research.
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Hasbrouck, Joel (2007): Empirical Market Microstructure: The Institutions, Models, and Econometrics of Securities Trading, Oxford University Press.