India's National Stock Exchange's (NSE) new closing auction system, introduced earlier this month, faced its first significant test during an MSCI index rebalancing, leading to substantial volatility in stock prices. The rebalancing, which took effect on September 1, spurred approximately $4.1 billion in trades during the NSE closing auction window on Monday, representing nearly 40 times the average since the new system's inception and 21% of cash-market volume. This surge in trading activity, driven by foreign institutional investors adjusting portfolios, caused sharp price swings in several stocks, highlighting both the increased adoption of the system and ongoing concerns about its impact.
Several Adani Group companies experienced notable declines, with Adani Enterprises Ltd. plunging 9.8% and Adani Energy Solutions Ltd. sinking more than 10%, contributing to a $15 billion loss in market value for the group. Reliance Industries also saw its indicative prices fall by 1.6% during the auction before settling 0.8% lower, despite having risen 0.6% earlier in the day. Conversely, Eternal erased intraday losses to close higher. The MSCI rebalancing added four Indian companies—Laurus Labs, Lenskart, Adani Energy Solutions, and Groww—to its global standard index, replacing Balkrishna Industries, SBI Cards, and Astral.
Market experts have voiced mixed reactions to the new system, particularly after previous instances of high volatility. While the Securities and Exchange Board of India (SEBI) maintains that wider participation will stabilize the system, some experts like Rohit Srivastava of Indiacharts.com and Chandan Taparia of Motilal Oswal Financial Services suggest a re-evaluation. They point to issues such as broker-readiness for specific order types and the 3% price band, which Taparia believes should be narrowed to 1-1.5% to reduce extreme swings. The system aims to prevent artificial influencing of closing prices, a practice possible under the older volume-weighted average price system, but its implementation has led to concerns about genuine price discovery during the auction window and its effect on daily closing prices for systematic trading strategies.
