Closing auction session gap narrows, but stock market worries remain

The gap between the Sensex and Nifty narrowed for a third straight session after the Closing Auction Session rollout, though market participants say structural concerns remain.

The divergence between the benchmark indices, the Sensex and the Nifty, continued for a third consecutive day on Wednesday following the introduction of the closing auction session (CAS), which is used to calculate the closing prices of stocks with derivatives contracts. However, the gap between the two indices narrowed to about 0.15 percentage points (pp).

 

The benchmark Nifty ended Wednesday’s session at 24,625, up 10 points, or 0.04 per cent. The Sensex closed at 78,581, gaining 152 points, or 0.2 per cent.

 

The Nifty was down 0.18 per cent as of 3.15 pm but gained 0.22 pp during the closing auction. Similarly, the Sensex was up 0.09 per cent at 3.15 pm and gained another 0.1 pp during the auction.

 

 

Under 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 of the session. Stocks without futures and options contracts continue to use the earlier method.

 

“The divergence between the Sensex and the Nifty narrowed on Wednesday because arbitrageurs stepped in to exploit the price difference between the two markets. As they bought in the relatively cheaper market and sold in the more expensive one, sell-side liquidity improved,” said a broker.

 

Prakarsh Gagdani, founder of Soaring Peaks Capital, said lower volatility may also have contributed to the narrowing of the divergence. “When volatility is high, prices can move rapidly during the final part of the trading session. This creates uncertainty about the appropriate closing value and may lead to larger order imbalances during CAS. Traders may place aggressive buy or sell orders to hedge derivatives positions, manage expiry-related exposure, or respond to sudden market movements. Since the CAS price is determined through the concentration of orders within a short auction window, such imbalances can push the auction price away from the pre-closing price,” Gagdani said.

 

Some market participants said the rollout of CAS had made structural limitations in the Indian equity markets more apparent. “The timing of its rollout is also unfortunate because the Reserve Bank of India’s new norms on capital-market exposure, which limit banks’ exposure to capital-market activities, are coming into effect at the same time,” Nithin Kamath, founder and chief executive officer of Zerodha, said in a blog post.

 

“There might be tweaks required in how CAS itself works. But the larger issue of our markets being shallow is a complicated problem to solve. It requires building an ecosystem that encourages all kinds of traders and investors, with different time horizons, to participate easily. Making short selling and securities lending easier, reducing distortions between instruments, and encouraging genuine market-making would be a good place to start,” Kamath added.