India's new closing auction mechanism, which began on Monday, determines the official closing prices of futures and options (F&O) stocks during a 20-minute auction from 3:15 p.m. IST, replacing the volume-weighted average price method. This reform led to sharp, unexpected swings in the Nifty 50, with the index jumping nearly 200 points on Monday after continuous trading, closing up 1.6%. The BSE Sensex, however, saw less movement, resulting in a rare divergence between the two benchmarks for two consecutive days.
On Tuesday, the Nifty 50 experienced further volatility on a weekly derivative expiry day, dropping 1.25% by 3:15 p.m. but recovering to be down 0.6% at the 3:35 p.m. closing price. This sudden shift caught traders off guard, impacting options premiums. Analysts like Rajesh Palviya of Axis Securities noted that the 20-minute window, where cash market trading stops, leaves traders "blind" to the Nifty's closing direction, suggesting the new system needs adjustments.
The divergence between Nifty and Sensex was attributed to institutional buying concentrated on the more liquid NSE during the auction, particularly in heavyweight stocks like ICICI Bank, HDFC Bank, Reliance Industries, Infosys, and Bharti Airtel, which boosted the Nifty 50. The BSE Sensex, with lower institutional cash-market activity, did not see a similar boost. This led to a significant gap in closing levels, with the Nifty's sharper rise attributed to participants placing buy orders above the prevailing market price within the 3% price band during the auction.
Industry bodies, such as the Association of NSE Members of India, are engaging with exchanges and the markets regulator, the Securities and Exchange Board of India (SEBI), to address these "teething issues." While the mechanism aims to enhance transparency and price discovery, and align with global practices in markets like NYSE and LSE, its initial implementation has raised concerns about its impact on market participants and the need for potential fixes.
