India's financial markets witnessed unprecedented volatility on a recent monthly derivatives expiry day, particularly within the newly introduced Closing Auction Session (CAS). The Bankex 65,000 Put option, for instance, dramatically surged from approximately 6 rupees to 1,000 rupees within minutes, representing a gain of up to 16,500%. Similarly, a 75,000-strike Sensex put option saw a 4,800% increase before moderating, highlighting the extreme price swings.
During the CAS, which runs from 3:15 PM to 3:35 PM, the Sensex experienced a sharp decline of over 2,200 points in just five minutes, between 3:18 PM and 3:23 PM. It then recovered nearly 2,000 points in the subsequent seven minutes, closing down 0.7% at 76,933.59 points. This sudden plunge and recovery were also reflected in individual Sensex constituents like Reliance Industries, which dropped 3% before recovering, and HDFC Bank, ITC, and Bharti Airtel, which saw similar volatility. The Nifty also slid over 100 points before recovering 60 points, closing down 0.48%.
Traders expressed dismay over these wild swings, with some illustrating potential massive gains; one scenario suggested a 100,000-rupee investment in Sensex put options could yield a 4.4 million rupee profit in five minutes. Analysts attributed the volatility partly to the lack of liquidity and depth in India's securities lending and borrowing (SLB) mechanism, which hinders market makers from efficiently short-selling to counter extreme price movements. The indicative price lag during the auction, which showed a potential 3.3% Sensex decline, also triggered panic among algorithmic trading desks.
The Securities and Exchange Board of India (SEBI) has already taken action against alleged manipulators. Copthall Mauritius, a JPMorgan arm, and Mansi Stock & Share Broking were banned from the market and ordered to disgorge illegal gains totaling approximately 3.8 crore rupees (38 million rupees) for manipulating Sensex and its constituents. The new CAS system, launched on August 3 for over 200 stocks, aims to align India's markets with global standards and curb price rigging, but its initial implementation has been met with significant challenges and scrutiny.
