Former Bharatiya Janata Party (BJP) MP Kirit Somaiya has written to Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey, demanding a temporary suspension and redesign of the newly introduced Closing Auction Session (CAS) mechanism, following an extraordinary 2,200-point intraday swing in the Sensex during the final minutes of trading on 27 August. The episode has reignited debate over the structural readiness of India's equity market infrastructure for auction-based price discovery.

What Triggered the Letter

The sharp market movement occurred between 3.20 pm and 3.30 pm IST on 27 August, when the Sensex reportedly crashed by more than 2,200 points before recovering approximately 2,000 points within the same window. Critically, this was the first monthly derivatives expiry since CAS was introduced, making the episode a live stress test of the new mechanism under peak-liquidity-demand conditions.

Somaiya urged SEBI not to treat the episode 'casually', arguing that if the volatility reflected a structural weakness in the CAS framework, officials responsible for its design must explain what went wrong. He also raised the possibility that the movement could have been deliberate, calling for a formal inquiry and appropriate action based on its findings.

The Structural Flaw Somaiya Identified

At the heart of Somaiya's critique is what he describes as a fundamental architectural problem: under the current CAS framework, continuous trading in CAS-eligible securities ends at 3.15 pm, after which the market transitions into a separate closing auction. Equity derivatives, however, continue trading until 3.40 pm.

According to Somaiya's proposal, this design 'switches off' a deep continuous market at precisely the moment when liquidity is most critical, and then expects a comparatively shallow auction to recreate adequate depth for closing price determination. He argued that a closing auction should build upon existing market liquidity — not first drain it and then attempt to reconstitute it through an auction mechanism.

Liquidity Fragmentation Across NSE and BSE

Somaiya also flagged a separate concern around market fragmentation. Under the current structure, the same security can undergo parallel closing auctions on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), each with independent order books, separate imbalances, and potentially divergent equilibrium closing prices. This, he argued, undermines the very purpose of a unified price discovery mechanism that CAS was intended to create.

Citing observations from a market participant, he noted that the absence of sufficient liquidity after 3.15 pm could systematically amplify volatility, as investors seeking to buy or sell in that window may not find adequate market depth to execute orders without significant price impact.

What Somaiya Has Proposed

In a proposal attached to his letter, Somaiya called for the immediate and temporary suspension of CAS, followed by a thorough redesign grounded in practical market considerations before any reintroduction. He stopped short of prescribing a specific alternative architecture but emphasised that any revised mechanism must preserve — rather than eliminate — continuous trading liquidity at the market close.

This comes amid broader scrutiny of SEBI's recent market structure reforms, several of which have drawn pushback from market participants over implementation timelines and real-world stress testing. How SEBI responds to Somaiya's letter is likely to shape the near-term trajectory of CAS and, more broadly, the regulator's approach to auction-based closing mechanisms in Indian equity markets.