India’s New Stock Market Closing Auction Sparks Trader Jitters Amidst Calls for Reversal
Mumbai, India – India’s recently implemented closing price auction system has sent ripples of uncertainty through the trading community, with many expressing concern over its initial performance. In its inaugural week, some market participants voiced strong opinions that this significant market structure reform is falling short of its intended goals, leading to calls for its immediate withdrawal.
However, the market regulator, the Securities and Exchange Board of India (SEBI), has firmly rejected these demands. Following urgent meetings with several of India’s leading stock brokerages, SEBI officials, including board member K.V.R. Murty, made it unequivocally clear that the closing auction will not be rolled back. Sources familiar with the private discussions, as reported by Bloomberg, indicated that SEBI views the current disruptions as mere "early-stage teething problems" and expressed confidence that the system’s efficacy would improve with increased investor participation.
The revised framework applies to over 200 stocks with listed derivatives and was first proposed by SEBI in 2024 to enhance price discovery and align India’s market practices with those of leading global exchanges. The initiative also sought to address the concerns of major index-tracking funds aiming to minimize tracking errors.
Early Days Marked by Volatility and Confusion
The initial days of the new system were particularly tumultuous. Last week, during Monday and Tuesday’s trading sessions, the closing auction surprisingly reversed parts of the NSE Nifty 50 Index’s intraday decline. This resulted in an official closing level that was higher than the index’s position when continuous trading concluded at 3:15 p.m. local time. This unexpected divergence created significant confusion across the market, forcing brokerages to contend with a surge of client queries and prompting retail investors to voice their concerns on social media regarding discrepancies between official closing prices and intraday trading levels.
While the disparity has since narrowed considerably due to SEBI’s efforts to encourage broader market participation, the initial impact highlighted the challenges of adapting to the new mechanism. By Thursday, the first weekly expiry of the BSE Sensex Index under the revised closing-price mechanism concluded with fewer disruptions, with the benchmark finishing 0.2% above its 3:15 p.m. level.
Traders Express Discontent and Strategic Shifts
Despite the marginal improvements, many traders remain uneasy. "Strategies that worked consistently for years have been buried alive," lamented Aamodh Kuthethur, a retail algorithmic options trader with nearly a decade of experience. He added, "My trading system is broken overnight."
The sharp price swings observed are largely attributed to limited participation in the new auction process. Many proprietary trading firms and high-frequency traders, typically crucial for providing liquidity on expiry days, either abstained from the closing auction or significantly curtailed their activity as they navigate the new framework.
Mayank Sachan, CEO of Zenskar Research, suggested that a smoother transition might have been achieved by "allowing some time for liquidity to develop before shifting to a closing auction." He further revealed that his proprietary trading firm has already scaled back its expiry-day strategies linked to index options.
Goldman Sachs Group Inc., in a client note, corroborated these observations, stating that weaker-than-expected participation had led to thinner-than-anticipated liquidity. This, they noted, allowed even relatively small buy and sell orders to disproportionately influence the equilibrium price, leading to fluctuations far greater than traders were accustomed to. These fluctuations carry significant weight, as the official closing price dictates the settlement of stock and index derivatives.
Bhautik Ambani, CEO of AlphaGrep Mutual Fund, a unit of the quantitative trading firm AlphaGrep, commented, "Every developed market has a closing auction. We just got there before the liquidity did."
Concerns Over Brokerage Revenue and Exchange Impact
The disruption has also triggered concerns within the brokerage industry regarding potential revenue impacts. Zerodha Broking Ltd. estimates that the new system could reduce industry-wide earnings by 1% to 5%. Jefferies anticipates a more substantial effect, projecting that a 10% to 20% decline in expiry-day contracts could lead to an overall 5% to 10% fall in options trading volumes.
The new framework could also affect the National Stock Exchange of India Ltd. (NSE), which is preparing for an initial public offering and relies heavily on derivatives trading for a significant portion of its revenue. Activity in equity futures and options on the country’s largest exchange had already experienced a 17-month low in July following the central bank’s tightening of funding norms.
SEBI, during its recent meetings, urged brokerages to accelerate technology enhancements and bolster participation in the auction process. The regulator’s stance is clear: the closing auction is here to stay, and the onus is now on market participants to adapt and contribute to its intended function.
