A whole month since India introduced closing auction sessions (CAS) to enhance transparency in stock prices, the new system remains marred by low participation and abrupt price swings. Market participants once used to full price visibility at the day's end now wait in suspense, as the auction and pricing mechanism plays out over the last 15 minutes.
On Thursday, the BSE Sensex plunged about 2,100 points in the first five minutes of the auction session, only to recover soon after. The index ultimately closed 417 points lower at 76,152.86. Thursday is the weekly derivatives expiry day for BSE.
On 3 August, the stock market regulator brought 213 stocks available for derivatives trading under CAS, in which a single equilibrium price is determined by matching the maximum number of buy and sell orders during the last 15 minutes of a trading day. The framework replaced the volume-weighted average framework.
Participation remained weak across most of August. Trade volumes during the closing session declined 24.3% from 3 August to 19.6 million on 28 August, while the trade value dropped 26% to ₹944.94 crore, NSE data showed. Participation recovered at the end of the month following the MSCI index rebalancing on 31 August. By 3 September, volumes rose by 4.7%, while value rose 14.2% to ₹1,457.74 crore.
A quarterly rebalancing by global index provider MSCI added four stocks to its standard indexes and removed three, besides reducing the weightage of Reliance Industries Ltd. Index rebalancing typically triggers portfolio flows as passive funds tracking these indices adjust their holdings.
However, it was not only the cash market which was struggling; the impact spilled over to the futures and options (F&O) segment.
About half of the volume and value in Bank Nifty futures vanished since CAS was introduced. Volumes fell 42% to 14,180 contracts, while value declined similarly to ₹2,445.72 crore on 2 September.
Nifty futures took a hit as well, as volumes fell 30% to 38,875 contracts and trade value dropped 20.5% to ₹6,148.77 crore on 28 August. The MSCI rebalancing, however, brought some of the activity back. By 2 September, Nifty futures volumes had risen 11% to 61,893 contracts and value 8.4% to ₹9,656.58 crore.
No quick recovery
Market experts said participation—especially from the retail side—is unlikely to pick up immediately.
“Retail participation is not expected to increase as people are unwilling to take a risk in the last 15 minutes of the trading day. However, institutions are more likely to participate if they are able to mitigate the uncertainty in prices,” said K. Suresh, president and chief executive officer (CEO) at India Cements Capital, a financial services firm. He added that derivatives volumes have fallen due to uncertainty about the closing price, as there are often sudden spikes, either up or down, by the time the closing price is determined.
Abrupt price movements have rattled many traders.
On the day CAS debuted, the Nifty surged 1.6%, while the Sensex gained only 0.7%. The Nifty jumped nearly 200 points in the final two minutes of order closing, opening a gap between the index, its underlying stocks and their futures.
On 26 August, the Nifty fell 271.4 points in 30 seconds after the auction began. Mint reported that a bid placed 3% below Bharti Airtel’s reference rate caused the move.
The episodes have made many traders wary, prompting them to wrap up trades before 3:15pm.
“The key challenge with CAS has been the uncertainty on expiry day, forcing option writers to stay away from the market. This has reduced the profitability of proprietary traders. We think Sebi could address challenges with CAS through de-linking options expiry from the CAS window; improving the stock lending and borrowing mechanism; and deepening the auction pool,” said a Jefferies report on 2 September.
“It is difficult to determine what is manipulation and what is simply an opportunistic trade by a trader. It is possible that during low liquidity, trades are made because traders see an opportunity. However, to the plain eye, that might look like manipulation,” said an official from a depository on the condition of anonymity.
Sebi action
On 19 August, Sebi barred Copthall Mauritius Investment Ltd and Mansi Share and Stock Broking Pvt. Ltd from accessing the securities market and ordered them to deposit a combined ₹3.68 crore over alleged manipulative trading during a Sensex closing auction session. Sebi alleged that the entities manipulated the session on 13 August, a weekly Sensex derivatives expiry day, making unlawful gains of ₹2.96 crore and ₹71.65 lakh, respectively.
A former regulatory official, speaking on condition of anonymity, defended the reform. “This is a very good move for the markets in the long run. Sebi is doing the right thing,” the official said.
“However, I do think the regulator could have implemented the framework better. They could have tested the system a lot better. They could also have taken up education on indicative prices better. We have such a high investor education budget, which could have been used to put up shows on every TV channel to educate market participants,” he added.
Sebi has made several efforts to improve participation in the segment since its debut. Mint reported on 19 August that the market regulator has asked brokers to update their systems to accept orders during the initial few minutes of CAS. The move is expected to improve price discovery and liquidity. The regulator has also asked brokers to display the reference auction price upfront on trading apps, so that retail participants can see attractive pricing and participate in CAS.
Despite a pushback from the industry, Sebi is not planning to roll back the framework.
Sebi chairman Tuhin Kanta Pandey said on 17 August that CAS was “here to stay for sure.” He added that the market regulator would examine and address constraints in the mechanism, but ruled out abandoning it because some market participants want to trade options differently.