One month into CAS: It didn’t break India’s options market. It exposed how narrow it is.

India’s new Closing Auction Session (CAS) has exposed a deeper structural issue in the derivatives market: extraordinary liquidity concentrated in a narrow universe of short-dated index options. The next stage of market development should focus not on weakening 0DTE products, but on building deeper liquidity.

 

For Nippon AMC, Nomura expects the flow share at 8.3% in August, with its three-month average flow share 2.1 percentage points above its AUM share of 7.4%.

 

India has built one of the world’s deepest short dated index options markets. The next stage is not to weaken 0DTE, but to replicate that liquidity across more products, tenors and underlyings.

 

India’s new Closing Auction Session has had an eventful first month.

 

Closing auctions themselves are hardly radical. They are a standard feature of developed markets, designed to concentrate liquidity at the end of the trading day and produce a more robust closing price.

 

Under India’s new system, continuous trading in eligible cash market stocks ends at 3:15 pm, followed by a closing auction until 3:35 pm. Equity derivatives, meanwhile, continue trading until 3:40 pm.

 

That small change has produced some extraordinary outcomes.

 

On August 13, a Sensex expiry day, SEBI subsequently issued an ex-parte interim order concerning alleged manipulative trades during the auction. Two weeks later, on the August monthly derivatives expiry, the Sensex at one point fell about 3.3% during CAS.

 

Then came August 31.

 

The MSCI rebalance brought roughly $4.1 billion of trading into the closing auction, almost 40 times the average CAS turnover since launch. Yet the broader benchmark impact was relatively contained.

 

That contrast is important. When genuine institutional liquidity arrived, CAS did what an auction is supposed to do.

 

The more interesting question is why expiry days can look so different.

 

The answer may lie not in CAS itself, but in the structure of India’s derivatives market.

India does not have a derivatives volume problem

 

India has already achieved extraordinary scale in derivatives.

 

The RBI’s Financial Stability Report, using SEBI data, put India’s notional derivatives to cash turnover ratio at 405 times in FY24, up from 269 times a year earlier and 98 times in FY22. Following regulatory changes, estimates put it at around 300 times by February 2025.

 

That number needs qualification. Notional option turnover exaggerates the amount of actual capital changing hands. On a premium basis, the RBI put the derivatives premium to cash ratio at 2.24 times in FY24.

But whichever measure one prefers, India is clearly not short of derivatives activity.

 

The policy question therefore should not only be: How do we make derivatives smaller?

 

It should also be: How do we make this enormous derivatives ecosystem broader?

 

The problem isn’t 0DTE

 

It is easy to draw the wrong conclusion from India’s concentration in short dated options. High 0DTE volumes are not, by themselves, evidence of an immature market.

The US is perhaps the best evidence.

 

In 2025, SPX 0DTE options averaged approximately 2.3 million contracts every day and accounted for 59% of SPX options trading. US exchanges are continuing to add short dated expiries.

 

Indian traders have discovered many of the same benefits. Nifty and Sensex weekly options combine liquidity, tight spreads, frequent expirations and straightforward index exposure. They are successful financial products.

 

The difference between India and the US is not the popularity of 0DTE. It is what exists alongside it.

 

The US market trades around 61 million listed option contracts on an average day and has listed options on roughly 4,400 stocks and ETFs. Beyond SPX, investors can access single stock and ETF options, sector products, VIX futures and options, long dated LEAPS and customised FLEX contracts.

 

India’s market is much more concentrated.

 

NSE had stock derivatives available on 213 securities as of March 2026. More importantly, Nifty 50 options alone represented 91% of NSE index options premium turnover, while SEBI found that more than three fourths of index options turnover in FY26 occurred on or close to expiry.

 

India has therefore developed extraordinary depth but much of that depth sits in a narrow part of the product universe.

 

CAS has inadvertently brought that concentration into focus.

 

Why CAS makes concentration visible

 

A closing auction determines the official closing price.

 

On an ordinary day, that primarily matters for valuation, benchmark tracking and institutional execution. On a derivatives expiry day, that same price can determine the settlement value of enormous derivatives positions.

 

India therefore has a peculiar market structure interaction: a very deep derivatives market, particularly around short dated index options, references closing prices determined through a relatively new cash market auction that can have much thinner liquidity than the positions tied to it.

 

When the auction itself attracts natural liquidity, it can absorb very large flows. August 31 demonstrated that.

 

Expiry days can expose the other side of the equation. There may be enormous economic interest attached to where an index settles without an equivalent amount of natural cash market interest in trading all its constituents during that particular auction.

 

That creates a liquidity mismatch.

 

The problem is not that traders use 0DTE options. Nor is it necessarily CAS.

 

The issue is that derivatives liquidity and underlying market liquidity can become concentrated in different places at exactly the same moment.

 

Listing contracts is not enough

 

India has tried to broaden its derivatives market before.

 

India VIX futures were introduced in 2014 but discontinued in 2017 after failing to develop sufficient liquidity. Other products have technically existed without developing meaningful order books.

 

Short dated index options took the opposite path: traders embraced them, spreads narrowed and liquidity attracted still more liquidity. Proprietary desks, market makers and retail traders congregated around the same products.

 

That success should be studied, not ridiculed.

 

The challenge is to recreate those network effects elsewhere.

 

An exchange can launch an option. It cannot decree liquidity into existence.

 

Without continuous two way quotes, spreads remain wide. Wide spreads discourage users, low volumes discourage market makers, and a contract can eventually exist on paper without functioning as a real market.

 

This is where liquidity providers and market making programmes become important.

 

India already permits liquidity enhancement schemes in illiquid securities. Exchanges could use such frameworks more aggressively to develop selected derivatives products, rewarding market makers for maintaining two sided quotes, reasonable spreads, minimum quantities and continuity across strikes and maturities.

 

The emphasis should be on market quality rather than simply generating turnover.

 

The US has long used designated and lead market maker structures. India need not copy that system, but it can develop its own mechanisms for helping promising products reach self sustaining liquidity.

 

Where should India build next?

 

Longer dated options are an obvious starting point. A trader seeking six month or one year optionality in India encounters a dramatically thinner market than someone trading the nearest expiry.

 

Single stock options offer another opportunity. India already has derivatives on more than 200 stocks; the challenge is to create deeper liquidity beyond the most actively traded names.

 

Sector products could also serve genuine hedging needs across banking, IT, pharmaceuticals, energy and consumption.

 

And India VIX derivatives deserve another look. Their first attempt failed, but US VIX options now trade close to one million contracts a day. The question should not be whether volatility derivatives failed once, but what contract design, market making commitment and institutional participation would be needed to make them viable today.

 

This is the most useful lesson from the US.

 

The US model is not “long dated good, 0DTE bad.”

 

It is to give participants multiple ways to express and hedge different types of risk.

 

The next chapter should be expansion, not retreat

 

SEBI has legitimate investor protection concerns. Its latest research found that 87.7% of individual equity derivatives traders lost money in FY26, with aggregate losses of approximately ₹91,685 crore.

 

Larger contract sizes, fewer weekly expiries and tighter monitoring are understandable responses.

 

But market protection and market development do not have to be opposing objectives.

 

India has already shown that it can build a world class derivatives product. Nifty options are exactly that. Their liquidity exists because participants find them useful and because liquidity itself created a powerful network effect.

 

0DTE is therefore not something India needs to apologise for. The world’s most mature options market is itself embracing shorter expirations.

 

The distinction is breadth.

 

With derivatives activity already several hundred times cash market turnover on a notional measure, India does not need to prove that it can generate more derivatives transactions.

 

It needs to build more places for that activity to go.

 

If I had to prioritise, I would start with longer dated options, deeper single stock and sector liquidity, and another serious attempt at volatility products. But this time, simply listing contracts will not be enough. Market makers and liquidity providers need to be part of the design from day one.

 

CAS has not exposed a failed options market.

 

Quite the opposite.

 

It has exposed how successful one part of India’s options market has become and how consequential that concentration now is for the rest of the market structure.

 

The answer should not be to weaken what works.

 

It should be to build more things that work.

 

 

 

 

 

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not sharechart. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.

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