‘Move in the right direction but timing probably not right’: Equirus Group’s trading head on CAS mechanism

Now, especially after the Jane Street incident, SEBI realised that at times it is easy to tilt the VWAP system in your favour because if you trade a big quantity during the closing moments of the session, the previous 30 minutes would not matter that much in the VWAP system. Many FIIs and global players also pitched that CAS would be a better mechanism to determine closing prices.

So now, until 3:15 pm, there is normal trading. All pending limit and market orders are then carried forward to the CAS, while stop-loss orders are removed from the system. Exchanges calculate reference prices from 3:15 pm to 3:30 pm. From 3:20 pm to 3:25 pm, you can place either market or limit orders. From 3:25 pm, you can only place limit orders, and the session ends at a random time between 3:27 pm and 3:30 pm.

Market orders help execute orders faster at the prevailing market price, while limit orders focus more on price than certainty of execution. Derivatives continue to trade until 3:40 pm.

How is CAS better than the previous system?

It is still evolving, so it would be very difficult to compare the two. But the participation level and price discovery become more democratic than when someone could tilt the price at the end.

Rather than having your order match with the closing price and being dependent on it, you can now participate and place orders at a higher or lower price, based on your requirements. So, you have that flexibility.

What is the reason for the thin volumes currently seen during the CAS?

It is something new that people have still not adjusted to. Also, whenever there is a change in a financial market, we see people first thinking it over and playing it out with caution rather than jumping into it.

What is happening is that the price-matching mechanism that operates for 5-7 minutes during the CAS is happening behind the scenes. So, you are not aware of the price at which your order is going to match.

Volumes are thin because people are still working out the probabilities around that blind spot. If I put an order for a particular quantity of a stock at a price 2% higher, it does not give me certainty about whether the entire order will be executed or whether I will find a match at the price I want. There is a higher chance that you would get under-executions, where only part of your order is executed.

Volumes are often driven by bigger players. All these players, such as arbitrage firms and prop (proprietary trading) firms, are sitting out currently because the new system is not allowing them enough time or visibility to hedge in the F&O market, and they do not run unhedged positions. So, the participants that are more active in generating volumes are currently sitting on the sidelines because of their own limitations.

What caused the wide divergence initially seen in the closing prices of the Nifty 50 and Sensex when the system was introduced? Can it be seen as bigger players gaming the new system?

That notable divergence was only seen for the first 2-3 days. Because everybody feared the unknown, nobody knew what to do. Everyone, including the exchanges and the systems, was operating on that thin line of preparedness.

I would not see it as big players gaming the system because ultimately everybody has the fear of the regulator. So, it is not about gaming the system; it is more about liquidity and impact cost. If I am running a position that needs to be squared off, I need to square it off.

So, until we see participation inching up and buyers and sellers being matched in equal magnitude, there are chances that this divergence or sharp movements will keep happening if there are any stock-specific moves.

When do you expect volumes to pick up in CAS?

It will take some time. Since there is a blind spot, the major participants, such as prop firms and institutions, are sitting on the sidelines. This may continue until SEBI comes in and realigns the end times. A lot of players are now requesting SEBI to close the derivatives market alongside CAS, removing the extra 10 minutes given to F&O.

What is happening is that trading in the CAS market stops at 3:30 pm, while derivatives continue to trade for another 10 minutes. But derivatives could see wild moves during that period, while the underlying has stopped trading.

Even during the five-minute window between 3:25 pm and 3:30 pm, the effective trading window is three minutes because the session ends at a random time to prevent last-minute manipulation by players. So, out of the last 15 minutes of trading, effectively, you have eight minutes to trade. That is 50% of your trading time. Thin volumes, to a large extent, are therefore due to these time limitations. The bigger players do not have enough hedging opportunities while making bets and are also under time pressure.

It is too difficult to gauge what will get executed and what will not. Somebody is a directional player, while someone else is a hedging player. They will have positions accordingly.

There are essentially two wheels on the wagon — CAS and F&O. One has stopped, while the other keeps going. Somewhere, there will be a mismatch, right? That is why we are seeing these kinds of swings.

How do you view the CAS system?

See, probably it is a move in the right direction, but timing-wise, we are probably still not a mature enough market for it. The other thing is that we have much higher retail participation in our market compared with other major markets. Other global markets are more institution-driven, where participants have access to all the necessary information on when and how to participate.

For us, awareness is still pretty nascent at the retail level. So, while SEBI had probably given us enough of a window, the new system could have been run in simulation or in parallel for longer before implementation to give market participants enough time to get used to it.

See, for example, most retail investors trade in small ticket sizes. So, if an institutional player places a big order, they are probably not going to get matched. Plus, retail traders will always choose to play in the derivatives segment compared with CAS because of the higher leverage.

So, we need more volume, more participation and more counterparties to find an equilibrium in the system.

So, as a retail trader, what exactly has changed for me with the new system?

Not much directly, unless and until you want to participate in CAS. Price discovery is going to be more democratic if you want to participate. You have flexibility on price rather than having a single price as before.

For example, under the previous system, the closing price was derived at 3:30 pm, and the post-closing session would start at 3:30 pm. You had to compulsorily trade at a price that was already determined. Now, you have a window to participate at your price. Whether the order will get executed or not is a separate question, but at least you can try your luck.

The opening price is also dependent on the CAS session, so nothing changes there. But this new system may bring higher volatility to the net asset value (NAV) of mutual funds, which could be another significant impact.