Closing auction mechanism settles after turbulent debut as swings ease

The Nifty's movement during the auction window narrowed from 82.4 basis points on the first day of implementation to 5.5 basis points on Friday as participation improved

The sharp end-of-day swings triggered by the new closing auction session (CAS) moderated through the week, with the Nifty's movement during the auction window narrowing from 82.4 basis points (bps) on the first day of implementation to 5.5 bps on Friday. This suggests that the initial price dislocations have eased.

 

The new mechanism, introduced on August 3 for all futures and options (F&O) stocks, got off to a turbulent start as gains in the Nifty50 almost doubled in the last 15 minutes on Monday.

 

On its debut, the Nifty rose 1.63 per cent while the Sensex gained only 0.72 per cent, resulting in an unusually wide divergence between the two benchmark indices.

 

 

Several heavyweight stocks also witnessed sharp price moves during the closing auction. It led to concerns over price discovery and its impact on derivatives, passive funds and exchange-traded funds (ETFs).

 

The initial volatility was largely attributed to thin participation during the auction window.

 

“Auction-decided closing price discovery led to uncertainty in the first few sessions as the auction pool was still thin and created large gaps between the 3.15 pm level and the official close. One major fallout was the uncertainty faced by option traders, as positions could see sharp moves during the auction window, leaving little room to respond once continuous trading ended at 3:15 pm,” said Anand James, chief market strategist, Geojit Investments.

 

Since then, exchanges and the regulator have focused on improving participation rather than altering the framework.

 

The National Stock Exchange (NSE) maintained that the mechanism is functioning as intended, while expressing confidence that liquidity would improve over time.

 

BSE has urged brokers and investors to participate more actively in the closing auction, saying deeper order books would lead to better price discovery and reduce volatility.

 

James said the moderation in volatility appears to reflect participants becoming more comfortable with the process.

 

“The improvement is most likely coming from participant adaptation, particularly aided by data disseminated during CAS, including equilibrium price and indicative tradeable quantity, lessening uncertainty, rather than any confirmed rule change or operational fix,” he said.