Mumbai: The Securities and Exchange Board of India (Sebi) has asked brokers to encourage greater participation by retail investors in the newly introduced closing auction session (CAS), amid concerns over sharp price swings and liquidity during the market’s final minutes of trading, three people aware of the discussions told Mint.
The regulator conveyed the message during a meeting with brokers on Tuesday, ahead of the second day of trading under the new framework.
One of the people cited above, who requested anonymity, said that the brokers agreed to Sebi’s request, and in turn told the regulator that the earlier closing of the continuous trading session at 3:15 pm from 3:30 pm meant that arbitrage funds of AMCs (asset management companies) can’t trade during this window as they have to initiate buy-sell legs simultaneously.
“This meant that supply could not match with demand from other large institutional players, leading to price spikes during the auction. Sebi told us they would look into this aspect,” he said.
The discussions took place against the backdrop of differences in closing movements of the Nifty 50 and Sensex for the past two days, with the Nifty spiking and the Sensex remaining relatively tepid.
On Tuesday, which was the weekly expiry day of Nifty options, the Nifty 50 closed down 0.64% at 24,614.9 while the Sensex settled 0.27% lower at 78,428.95. A day earlier, a 200-point spike in two minutes during the auction session caused the Nifty to rally 1.6% against Sensex’s rise of 0.7%.
Tuesday’s difference would have been wider but for the fact that the Nifty jumped 151.45 points from 24,463.45 at the close of the continuous trading session at 3:15 pm to auction closing at 3:35 pm. In comparison, the Sensex rose just 104.39 points during the same period.
Market participants also raised the possibility of sharp surges in options prices during Thursday’s Sensex options expiry, owing to very low liquidity in the BSE CAS.
Data from the exchanges showed that BSE’s auction value was just ₹9.4 crore compared with ₹1,542.4 crore for NSE’s auction value on Tuesday.
“The closing price situation today (Tuesday) was a little better than yesterday, but it does bring the Sensex weekly expiry (Thursday) into focus,” said another broker.
“Sebi is in support of this framework and has told all brokers to educate their members on CAS and encourage them to participate. However, some traders/ investors are also showing disinterest and choosing to not engage in CAS owing to uncertainty over the closing price,” he added.
This broker cited the surge in price of the 24,450 Nifty call option, which expired on Tuesday. Against a volume weighted average price (VWAP) of ₹91.68 a share just before the auction, the call option ended at ₹164.85 a share at 3:40 pm.
While the continuous cash market runs from 9:15 am to 3:15 pm under CAS, derivatives run till 3:40 pm and use the closing price at auctions on expiry days to settle options.
Queries to Sebi went unanswered till press time.
Market participants said the absence of arbitrage funds could reduce liquidity during the closing auction, especially on days with large institutional trades.
A fund manager said ₹3.4 trillion of arbitrage funds run by MFs are unlikely to participate in CAS as neither the final execution price nor the allocated quantity is known in advance. Without that certainty, they cannot effectively hedge their exposure by taking offsetting positions in the futures market.
“This becomes particularly relevant on index rebalancing days, when passive funds execute large portfolio adjustments. If arbitrage participants stay away from the CAS, a key source of liquidity is lost, making it more challenging to absorb these large orders efficiently,” he added.
If a fund voluntarily restricts its trading during a particular period, it may have to let go of attractive investment opportunities.
Arbitrageurs are participants who exploit price differentials between assets, thereby imparting liquidity to markets.
