Closing auction keeps traders on edge as divergence persists

Mumbai: The divergence between Sensex and Nifty levels persisted for the second day on Tuesday as market participants continued to grapple with confusion around the rollout of the closing auction system launched the previous day. The expiry of Nifty weekly futures and options contracts on Tuesday added to the complexity, with several traders taking to social media complaining of unexpected moves in derivatives prices and losses on their positions.

The Sensex ended at 78,428.95, down 210.08 points or 0.27%, while the Nifty closed at 24,614.90, down 159.40 points or 0.64%, coming off early lows. At the day’s lowest levels, the Sensex was down 0.5% and the Nifty was down 1.4%. The partial recovery happened in the last five minutes of trading.

Read more: Nifty’s value doesn’t change suddenly at 3:30 pm, NSE clarifies amid CAS confusion

The differences in the intraday and closing levels over the past two days follow the introduction of the closing auction system, which changes the way the official closing prices of stocks traded in the futures and options (F&O) segment are determined. The closing prices are used to calculate index closing levels, value mutual fund portfolios and settle derivatives contracts.

Trading Volumes
“The main cause of the last-minute spike in the Nifty appears to be participation in the CAS (closing auction system) session, or possibly the lack of it because of the confusion,” said Kamlesh Shroff, president, Association of NSE Members of India. “While NSE’s CAS volumes were higher compared to yesterday, the number of UCCs (unique client code) traded during the CAS fell on Tuesday, suggesting fewer participants had a larger influence on the Nifty’s close. This makes it easier for large orders to move the market.”

The fall on Tuesday is a reversal of the previous day’s upmove when a late surge of 0.8% at around 3.28 pm led to the Nifty surging 1.6% at close, while the Sensex ended 0.7% higher, creating an unprecedented variance.

The new closing auction process, limited to the 200-odd stocks in the F&O segment, lasts about 20 minutes, from 3.15 pm to around 3.35 pm. During this period, the exchange first collects buy and sell orders and then matches them to determine a single official closing price for the stockUnder the old system, the closing price was based on the volume-weighted average price (VWAP) of trades during the last 30 minutes of trading. Unlike the earlier system, the new mechanism concentrates buy and sell orders into a single closing auction, making the closing price more sensitive to large orders.

The shift to the closing auction system has resulted in a drop in trading volumes in the last part of the trading session, said brokers. “The cash market saw volumes of only about Rs 1,500 crore in the last 30 minutes, against the usual Rs 6,000-7,000 crore, while open interest also declined,” said Samir Doshi, CEO, Marwadi Shares and Finance. “This makes market moves difficult to track and raises concerns around mutual fund NAV tracking and index rebalancing for MSCI or FTSE.”

F&O EXPIRY
Brokers said many traders and investors were still adjusting to the new closing auction mechanism, with several caught off guard during the first equity derivatives expiry under the new system on Tuesday. “This Tuesday’s expiry looked very different from the moves we usually see on expiry days, particularly as the index again shot up in the last few minutes of trading,” said Doshi. “We saw unusual moves in option prices, with virtually no decay in ATM (At the money) options, which is typically seen through the day by the close.”

Doshi said the uncertainty over how long the abrupt price moves would last is unnerving. “The Nifty climbed nearly 150 points late on Tuesday, and is likely to open lower again on Wednesday. This is making us question when this cycle will end.” Traders will now watch the expiry of the Sensex weekly derivative on Thursday to gauge the impact of the closing auction system on activity. “We are more worried about BSE, where volumes are so low that any sort of index manipulation would become much easier in the CAS session,” said Doshi. Shroff expects “normalcy” to return to the markets by Nifty’s monthly expiry later this month, saying participants are likely to have adjusted to the new system by then.