Summary:
BSE derivatives volumes declined sharply in August after the Closing Auction Session (CAS) took effect, raising concerns over liquidity and transaction income. However, September trading shows early recovery, while SEBI reviews derivative settlement prices following market participant feedback.
The introduction of the Closing Auction Session (CAS) has created fresh concerns for BSE investors as derivatives trading activity weakened sharply in August. While the new mechanism was introduced to improve closing price discovery, its impact on trading volumes has raised questions about liquidity, transaction income and the exchange’s near-term earnings.
BSE Derivatives Volumes Take a Hit
CAS came into effect on August 3, replacing the earlier volume-weighted average price mechanism for determining closing prices of stocks with derivatives. The change has been particularly visible in the derivatives segment, where traders have reduced activity around the closing period amid concerns over increased volatility and lower liquidity.
BSE’s average daily option premium turnover declined 26% month-on-month in August to ₹18,672 crore. This compared with a 16% decline on the NSE, where average daily option premium turnover stood at ₹42,332 crore. The sharp fall has become a concern because derivatives are an important source of transaction revenue for exchanges.
The decline was also reflected in BSE’s broader derivatives activity. BSE’s equity derivatives average daily turnover fell sharply in August, while traders adjusted their strategies to avoid the uncertainty surrounding the new closing mechanism.
September Shows Early Signs of Recovery
There are, however, some signs that the initial disruption may be easing. BSE’s average daily option premium turnover during the first few trading sessions of September recovered to ₹26,184 crore, around 40% above the August average.
This recovery is important because a sustained improvement in trading volumes could reduce some of the pressure on BSE’s transaction income. Market participants are also watching whether traders gradually become more comfortable with the auction-based closing process.
The exchange had earlier seen its average daily option premium turnover rise to around ₹27,000 crore and above during several months before the August decline. The sharp fall therefore represents a meaningful change in trading activity rather than a normal month-to-month fluctuation.
Why Is CAS Creating Concerns?
The primary concern is the change in how prices are discovered during the final part of the trading session. Under CAS, orders are accumulated and matched through an auction instead of continuous trading. This can make it harder for traders using strategies that depend on continuous order flow, particularly around derivatives expiry.
The impact can be more pronounced when large derivative positions need to be hedged against the underlying cash market. Lower liquidity during this period can potentially increase price swings and make execution more difficult.
The concerns have also reached the regulator. SEBI has said it will review the methodology used for determining settlement prices of derivative contracts following feedback from market participants. The regulator is expected to propose changes through a consultation process.
