(Chapter 7)
Like the filter merchant mentioned in Chapter 6, SEBI is selling a copycat solution without adequate transparency. Again, there is no representation of the public, much less retail investors. The deliberations of meetings of SEBI are not transparent. Unlike other regulators who conduct public hearings and encourage debate, SEBI acts like a Government Ministry, but without the oversight of the Cabinet. Yet it is calling it a unique solution.
There was a time dogs used to fly. In that era, every American solution worked for the whole world. The American Empire is disintegrating, but its loyalists still look up to it for solutions.
Copying a Tool Built for a Different Market
SEBI has decided to copy what US markets are doing without reflecting upon the numbers.
Wealth and money are two different things. Never before in human history was there so much money supply (called M3 in economics) in the system as there is today. Yet SEBI does not seem to be even aware of it.
When regulators transplant a mechanism from one market to another, the burden of proof is on them to show that the underlying conditions are comparable. SEBI did not meet this burden. The evidence that it did not is now visible in the results.
The NYSE Closing Auction is the largest single liquidity event in US equity markets. In Q1 2026, it handled a daily average of 605.5 million shares, accounting for over $43 billion in value per day. On March 20, 2026 alone, the auction matched 3.57 billion shares worth $230.5 billion.
The US closing auction works because institutional demand for execution at the official close is itself massive. Index funds, ETFs, pension funds, and large asset managers all need to transact at closing prices for benchmarking and rebalancing purposes. The NYSE Closing Auction was built to service that demand at scale. Designated Market Makers provide liquidity discipline. The Closing Offset order type exists specifically to let institutions interact with residual auction liquidity with minimal price impact. The entire architecture is designed around large institutional participation as the dominant force.
India’s market is structured differently. About 62% of the US population holds equity. In India, direct demat account penetration is roughly 12%. Yet Indian retail investors directly held 18.75% of NSE-listed companies’ market capitalisation as of Q2 FY2026, a 22-year high. This is not a market where retail is peripheral.
Retail in India is a structural participant with direct ownership stakes.
The trading behaviour data tells a more specific story. The share of retail in the active cash segment has been falling, from a pandemic peak of 45% in 2020-21 to 34.2% in 2025-26, the lowest in nearly a decade. This decline reflects a shift away from direct intraday cash trading. But that shift has not moved Indian retail toward the auction-based, institutionally intermediated model of the US. It has moved retail toward derivatives, particularly weekly options, where direct exposure to settlement prices is immediate and unmediated.
The Distinction Between the US and India
This is the crucial structural difference that SEBI ignored. The NYSE Closing Auction is designed for large institutional execution. It handles tens of billions of dollars daily because institutions need to trade at the official close for portfolio management reasons, and the market structure supports that with deep liquidity and dedicated market makers.
The Indian CAS was imposed on a market where retail holds direct equity stakes, where retail participates directly in derivatives rather than through intermediaries, and where no comparable pool of institutional auction liquidity exists to absorb imbalances and stabilise the equilibrium price.
A mechanism that works because it is large, deeply liquid, and institutionally anchored cannot simply be transplanted into a market that is smaller, more retail-direct, and without the institutional infrastructure that makes the original mechanism function. What you get instead is what India saw on August 3 and August 4: thin auction order books producing equilibrium prices that no one in the continuous session had approached, and those artificial prices then destroying real positions on expiry day.
SEBI’s defence of the CAS has relied on pointing to global best practice. The NYSE closing auction is indeed the global reference point. But global best practice in a context where closing auctions handle $43 billion a day with deep institutional participation is not the same practice in a context where the auction book has 515 trading members and retail is the dominant direct participant.
Copying the tool without replicating the conditions produces a different outcome. India has now seen what that outcome looks like.
Who Gets the Extra Time?
The CAS mechanism is often described in neutral terms: a new price discovery system. But price discovery requires participants. And the critical question is which participants are actually present and equipped to operate in the CAS window.
Retail trading in India runs on continuous price feeds, live bid-ask spreads, and visible LTP updates. When continuous trading ends at 3:15 PM, retail traders lose their primary operating environment. Stop-loss orders are cancelled. The live price feed is replaced by an Indicative Equilibrium Price that retail participants neither understand nor have systems to act on in real time. Many retail intraday traders have already been forced out of their positions by the mandatory 3:05 PM square-off deadline. For most retail participants, the market ends at 3:15 PM.
For high-volume institutional players, the situation is entirely different. They operate on direct market access, algorithmic order routing, and systems that can interact with an auction order book as readily as with a continuous session. The 20-minute auction window is not opaque to them. It is another operating environment in which they have a decisive capability advantage.
The net effect of CAS is straightforward: regular trading time has been reduced by 15 minutes, from the old 3:30 PM close to the new 3:15 PM cutoff. Those 15 minutes have not been eliminated. They have been reallocated to an auction mechanism that is navigable only by participants with the systems, capital, and information to participate effectively. High-volume players qualify. Most retail participants do not.
But SEBI did not stop there. On top of the 15-minute auction that retail cannot effectively participate in, the mechanism also extends F&O trading until 3:40 PM. This is an additional 10-minute window, running from 3:30 PM to 3:40 PM, in which institutional participants can adjust their options positions based on the confirmed CAS closing price while retail faces severe illiquidity.
The structure, taken as a whole, takes 15 minutes away from the regular trading session that retail can use and gives that time to a high-volume auction process that institutions are better equipped to operate in. It then grants an additional 10 minutes of F&O access to those same players to make derivative adjustments after the price is set. This is not an unintended side effect. It is the arithmetic consequence of the system’s design.
Price Discovery
All this is aimed at price discovery. And what is the result? A price that no one knows will hold true.
NSE and BSE run separate order books for their respective Closing Auction Sessions. The equilibrium prices discovered by each exchange for the same stock need not be identical. Since all Nifty stocks are F&O eligible, their NSE and BSE auction prices can diverge. This creates a gap between the Nifty, which is computed from NSE constituent prices, and the Sensex, which reflects BSE prices. It also creates a gap between the Nifty spot level and Nifty futures, which continued trading on their own terms through the session.
The official closing prices of the same underlying stocks are different on the two exchanges simultaneously. A system designed to produce a single, transparent, unmanipulable closing price has produced a bifurcated one.
So much for regulatory success of SEBI.
The most powerful regulator in India seems to be on a self-destructive trajectory. We discuss that in the next chapter.
References:
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NYSE Research: Behind the Record Volumes: A Hidden Opportunity (Stefanos Bazinas, Head of Research and Analytics, NYSE, April 2026) https://beta.nyse.com/research/insights/behind-the-record-volumes-a-hidden-opportunity
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Auction Data of NYSE https://www.nyse.com/trade/auctions
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Ventura Securities: The CAS Conundrum: Why Nifty Fell Nearly 200 Points While Sensex Stayed Flat
The CAS Conundrum: Why Nifty Fell Nearly 200 Points While Sensex Stayed Flat