India’s newly introduced closing price auction system has left traders jittery as they adjust to the new system. During the first week of trading under the new system, some traders said that one of the country’s most significant market structure reforms in recent years was failing to deliver as intended.With demands mounting for the new mechanism to be withdrawn, the market regulator convened meetings with several of India’s leading stock brokerages and made its position unequivocal: the closing auction will not be rolled back.People familiar with the private discussions told Bloomberg that senior Securities and Exchange Board of India (SEBI) officials, including board member K.V.R Murty, told market participants that the system was experiencing only early-stage teething problems and expressed confidence that its functioning would improve as more investors participated.Also Read | Will Nifty & Sensex continue to diverge? What new stock market timings, closing auction session meanThe meetings followed the first two trading sessions under the revised framework, including Tuesday’s expiry session on the National Stock Exchange of India Ltd., which saw unexpected price movements that created confusion across the market.Brokerages found themselves responding to a surge of client queries, while retail investors turned to social media after noticing that the official closing prices appeared to differ from where stocks had traded during the day.
The first few days
The impact was most visible during the first two trading sessions. Last week on Monday and Tuesday, the closing auction reversed part of the NSE Nifty 50 Index’s intraday decline, resulting in an official closing level that was higher than the index’s position when continuous trading ended at 3:15 p.m. local time. Since then, the difference has narrowed considerably as participation has increased following the regulator’s efforts to encourage the market.
What is Closing Auction Session?
By Thursday, the first weekly expiry of the BSE Sensex Index under the revised closing-price mechanism was completed with little disruption, and the benchmark finished 0.2% above its 3:15 p.m. level.Despite the improvement, traders remain uneasy about the new system. “Strategies that worked consistently for years have been buried alive,” said Aamodh Kuthethur, a retail algorithmic options trader for nearly a decade. “My trading system is broken overnight.”Also Read | Why stock market’s close is now an auction – explained
The new closing system: Why the fluctuations?
The revised closing-price mechanism applies to more than 200 stocks with listed derivatives. SEBI first proposed the framework in 2024 after major index-tracking funds sought a closing auction to minimise tracking errors.The regulator has said the new system is intended to strengthen price discovery and bring India’s market structure closer to the practices followed by leading global exchanges.During meetings held on Tuesday and Wednesday, SEBI called on brokerages to accelerate technology enhancements and increase participation in the auction process so that the mechanism could function in the manner it was designed to, the Bloomberg report said.Market participants believe the sharp price swings are largely the result of limited participation in the new auction process. A number of proprietary trading firms and high-frequency traders, which typically provide liquidity on expiry days, either stayed out of the closing auction or scaled back their activity while the new framework was settling in.“Allowing some time for liquidity to develop before shifting to closing auction may have facilitated a smoother transition,” said Mayank Sachan, chief executive officer of Zenskar Research. He added that the proprietary trading firm had cut back its expiry-day strategies linked to index options.Goldman Sachs Group Inc. told clients in a note that weaker-than-expected participation had left liquidity thinner than anticipated. Consequently, even relatively small buy and sell orders were able to push the equilibrium price much more sharply than traders were accustomed to.Those fluctuations carry added significance because the official closing price is used to settle stock and index derivatives. “Every developed market has a closing auction. We just got there before the liquidity did,” said Bhautik Ambani, chief executive officer of AlphaGrep Mutual Fund, a unit of the quantitative trading firm AlphaGrep.
Brokerage revenue concerns
The disruption has also sparked concerns about its impact on brokerage revenues. Zerodha Broking Ltd. estimates the new system could reduce industry-wide earnings by between 1% and 5%. Jefferies expects a larger effect, saying that a 10% to 20% decline in expiry-day contracts could lead to an overall fall of 5% to 10% in options trading volumes.The new framework could also affect the National Stock Exchange of India Ltd., which is preparing for an initial public offering and derives a substantial portion of its revenue from derivatives trading. Activity in equity futures and options on the country’s largest exchange had already fallen to a 17-month low in July after the central bank tightened funding norms.
