Closing Auction System set for first monthly derivatives expiry test

By Savio Shetty

 

Indian traders are bracing for their first monthly derivatives expiry using auction-based end-of-day stock prices, a crucial test for a mechanism that has faced backlash over sharp swings and allegations of manipulation.

 

The new system has operated through regular sessions and a weekly expiry since its launch on Aug. 3. Tuesday’s expiry will see a broader swath of derivatives positions, including physically settled single-stock options, tied to the auction-generated closing prices.

 

“A weekly index expiry is one thing, but a monthly expiry brings stock futures and options into the equation, making the closing price much more consequential,” said Kruti Shah, a quantitative analyst at Equirus Securities.

 

 

Intended to bring India in line with major global markets, the system has had a difficult start. Many proprietary trading firms and high-frequency traders have stayed away, contributing to thinner volumes during the auction. Arbitrageurs have also lost some of their most profitable opportunities because the late-session window for trading stocks and derivatives at the same time has narrowed.  

 

The mechanism has already drawn regulatory scrutiny. The Securities and Exchange Board of India last week barred two firms, including a unit of JPMorgan Chase & Co., from the market for allegedly manipulating prices during the auction.

 

Tuesday’s monthly expiry brings an added risk: single-stock options. A sharp move in a stock during the auction can turn an option set to expire worthless into one that is in the money. Because these contracts are physically settled at expiry, investors could suddenly have to deliver shares or funds.

 

“One move can change the settlement completely,” said Maurya Ghelani, a derivatives strategist at Kai Securities in Mumbai. 

 

Sebi has previously warned about this risk. It has extended derivatives trading beyond the auction, giving investors more time to adjust their positions once there is greater clarity over the closing price and their delivery obligations.