Closing auction sparks divergence in benchmark indices for second day

Thin liquidity and institutional orders during the Closing Auction Session continued to widen the gap between the Sensex and Nifty, raising concerns over price discovery

The sharp divergence between benchmark indices Sensex and Nifty continued for a second consecutive session on Tuesday, as the newly introduced Closing Auction Session (CAS) triggered large swings in the Nifty 50 during the final minutes of trade.

 

The two indices recorded a 0.4 percentage point difference on Tuesday. The Sensex ended the session at 78,429, a decline of 210 points, or 0.3 per cent. The Nifty, meanwhile, ended the session at 24,615, a decline of 159 points, or 0.64 per cent. The 50-share benchmark was trading at 24,463.45 until 3.15 pm, but moved up 0.6 per cent during the closing auction, limiting its decline.

 

The new mechanism for determining the closing prices of stocks in the futures and options (F&O) segment had a rocky start on Monday, with the Sensex and the Nifty ending the session with a 0.9 percentage point divergence. 

 

Under the CAS, closing prices are determined through an auction held between 3.15 pm and 3.35 pm. The system replaces the earlier method of calculating closing prices using the volume-weighted average price of trades during the final 30 minutes.

 

Market participants said thin liquidity during the auction window, combined with a concentration of institutional orders on the NSE, was pushing heavyweight Nifty stocks sharply higher. The effect was far less visible on the BSE, where institutional cash-market activity remained limited. Turnover during the closing auction stood at ₹1,542.65 crore on the NSE and ₹9.36 crore on the BSE on Tuesday.

 

The volatility was particularly significant because Tuesday marked the weekly expiry of derivatives linked to the Nifty.

 

“The concern is that prices during the auction window are being discovered at levels significantly different from those seen at the end of regular trading. The impact was particularly pronounced on Tuesday because it was a weekly derivatives expiry day. Contracts that appeared set to expire with little or no value before 3.15 pm could suddenly acquire value because of the sharp rise in the Nifty during the closing auction, creating unexpected gains and losses for market participants,” said Prakarsh Gagdani, founder of Soaring Peaks Capital.

 

Gagdani added that while it would be premature to draw conclusions, the possibility of speculative activity around the closing price could not be ignored, especially on expiry days.

 

“The framework may, therefore, require some recalibration. The current 3 per cent price band appears too wide for a mechanism intended to establish a representative closing price. A much narrower band, possibly linked to the average price during the final part of regular trading, could reduce extreme movements and improve confidence in the closing-price discovery process,” Gagdani said.

 

Brokerages, meanwhile, have begun advising retail clients to close their equity and derivative positions before 3 pm until price discovery becomes more predictable.

 

“In effect, the closing auction caused a rapid change in settlement values at a time when traders had little opportunity to adjust their positions. That is why we advised retail clients to close their positions before 3 pm or, at the latest, before the regular market session ended at 3.15 pm. A sharp move during the auction can quickly alter the value of multiple positions and materially change a trader’s profit or loss. Until liquidity improves and price discovery becomes more stable, carrying positions into the closing auction will remain risky,” said a senior executive at a brokerage on condition of anonymity.

 

The Securities and Exchange Board of India (Sebi) did not respond to queries on the divergence between the benchmark indices.