Sundararaman Ramamurthy, CEO and Managing Director of BSE Ltd., stated that India's newly implemented Closing Auction Session (CAS) is experiencing thin liquidity due to a lack of participation from key market players. These include retail investors, proprietary traders, and high-frequency trading (HFT) firms, who reportedly do not see sufficient benefit from the system. This low engagement has led to significant price volatility during the end-of-day trading window, prompting the BSE to engage with market participants to address their concerns and potentially implement minor system changes.
The CAS mechanism, introduced on August 3rd to align Indian markets with global peers, has faced difficulties since its launch. It replaced the previous method of calculating closing prices based on the last half-hour of trading. However, the system's debut has negatively impacted options turnover at both BSE and the National Stock Exchange of India Ltd. For instance, average daily turnover for index options premium declined to its lowest in approximately 1.5 years in August, according to Jefferies Financial Group Inc. analysts. The CAS window at BSE typically sees an average turnover of just ₹10-₹20 crore, occasionally spiking to ₹60-₹90 crore on unusual days, which Ramamurthy indicated needs to be significantly higher for effective price discovery.
Market data corroborates the challenges, showing a substantial drop in trading volumes and values during the CAS window. A Mint analysis revealed that the last 15 minutes coinciding with the auction became the least busy window of the day, accounting for just 1.59% of the average daily volume of shares traded during the continuous trading session. This contrasts sharply with the previous system where the last 15 minutes were often the busiest. For example, Bank Nifty futures saw volumes fall by 42% to 14,180 contracts and value decline to ₹2,445.72 crore by September 2nd, while Nifty futures volumes dropped 30% to 38,875 contracts and trade value by 20.5% to ₹6,148.77 crore on August 28th. Despite a recovery in participation towards the end of August due to MSCI index rebalancing, overall engagement remains weak, particularly from retail investors.
Several issues contribute to the low participation. Market experts, such as K. Suresh, CEO of India Cements Capital, noted that retail participation is unlikely to increase immediately due to the unwillingness of individuals to take risks in the final 15 minutes of trading, coupled with the uncertainty in closing prices. This uncertainty, marked by sudden spikes and divergences between index and underlying stock prices, has deterred option writers and reduced the profitability of proprietary traders. The Securities and Exchange Board of India (SEBI) has attempted to improve participation by asking brokers to update systems to accept orders during CAS and display reference auction prices upfront, and has also taken action against entities for alleged manipulative trading during auction sessions.
Broker feedback suggests potential solutions, including de-linking options expiry from the CAS window, improving the securities lending and borrowing mechanism (SLBM) which is less vibrant in India compared to global markets, and deepening the auction pool. Some also point out that unlike major global exchanges, market-making is not permitted during CAS in India, which could otherwise help narrow bid-ask spreads and prevent wide price divergences. The general sentiment is that volumes will only increase as investors and brokers adapt to the new system and as more diversified participation, beyond current passive investors and HFTs, materializes.
