Widely read:
Ujjal Das/AI-Generated Image
Summary: On August 13, SEBI alleges, two entities moved the Sensex close by 240 points for Rs 57 lakh in the cash market and made Rs 3.68 crore on options. The auction's transparency caught it within six days. The weakness is a window that allows a large order to be placed and cancelled seconds later. That window should be closed. Instead, SEBI has pointed to changing the settlement price for derivatives, which could leave one market with two closing prices. Long-term investors need do nothing, but this reform is worth defending.
A month ago we wrote that the market's close had become an auction. For thirty years the closing price was an average of the last half hour of trades, a price at which nobody actually traded. From August 3, stocks in the F&O segment stop normal trading at 3:15 pm, all orders go into a single pool, and the exchange finds the one price at which the most shares change hands.
We said the change was good, because an index fund can now transact at exactly the price its index is built on. We also flagged one risk. The first day was untidy, but it was not an expiry day. On an expiry day, real money would move.
It took ten days.
What happened on August 13
August 13 was a Sensex weekly expiry. According to SEBI's interim order of August 19, in the first two seconds of the auction one foreign portfolio investor placed Rs 66.58 crore of buy orders across all 30 Sensex stocks, 99.91 per cent of all buy interest in those seconds, every order priced at the 3 per cent ceiling. The index jumped 362 points. At 3:26 pm the entity cancelled Rs 98.12 crore of orders it had placed seven seconds earlier. It held call options and had written put options at strikes around 78,000. A higher close paid on both.
A domestic broker ran the same trade in reverse. It placed sell orders for 12.65 lakh shares across eight Sensex stocks, most of them well below the reference price, and then cancelled all of them within three seconds.
SEBI's arithmetic is that the Sensex closed at 78,080 against roughly 77,840 implied by the Nifty's move that day. The gap of 240 points cost about Rs 57 lakh in the cash market. The gain in options was Rs 3.68 crore, which has been impounded. The findings are prima facie and both parties may reply.
The auction is not the culprit
Under the old average, these orders would have disappeared among thousands of trades. The auction publishes an indicative price every second, and that is how SEBI's surveillance spotted the spikes. The transparency that traders are now complaining about is what caught the trade.
The design gap is narrow. Market orders are frozen at 3:25 pm, but limit orders can be placed and cancelled until the random close. Both entities used that window. The New York Stock Exchange freezes cancellations ten minutes before the close. Hong Kong bars them in the final minutes. Extend India's freeze to limit orders and the August 13 trade becomes impossible. It would take one line in a circular.
What SEBI announced instead
On September 3, SEBI said it had taken feedback from brokers, proprietary traders, foreign investors, mutual funds and, in its own words, social media. The concern it named was not the cancellation window. It was "the determination of settlement prices of derivative contracts on expiry based on the closing price determined through CAS". A consultation paper is due within a week.
That is not a proposal to fix the auction. It is a proposal to stop using the auction's price to settle derivatives, which would mean two closing prices for the same stock on the same day.
The arbitrage fund problem
An arbitrage fund buys a stock and sells its futures. The category now holds nearly Rs 3 lakh crore, and it rests on one certainty: at expiry, the stock and the future meet at the same price. That is why we told investors in August to sit through the NAV bump.
If the stock is valued at the auction close but the future settles at an average, the two legs no longer meet. Every expiry then carries a gap, and the gap shows up as NAV noise in a category that investors buy precisely because it is dull. A two-day problem would become permanent by design.
The index fund problem
Many index funds and ETFs hold Nifty futures against fresh inflows until they buy the underlying stocks, and unwind both at the close. That works only when the future settles where the index closes. Separate the two, and the tracking error the auction removed comes back.
What you should do
If you invest through SIPs and hold for years, nothing.
If you hold an arbitrage fund, stay where you are. Convergence at expiry is still guaranteed. A separate settlement price for derivatives is the one change that would alter how your fund works, so read the consultation paper when it comes.
If you hold index funds or ETFs, keep an eye on the tracking difference your fund reports.
If you trade F&O, your complaint has a fair core. A manipulated print settles real money. The remedy is a cancellation freeze, not a retreat from the auction.
The bottom line
The closing auction took two public consultations and years of work, and it caught its first manipulator within six days. The design gap is a single window that every major market has already closed. SEBI has shown a pattern before, most recently with flexi-cap funds: faced with a loud objection, it built an exit rather than hold the line. The right consultation paper closes the cancellation window and keeps one closing price. The wrong one passes the cost to arbitrage and index fund investors, who were never the problem.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
