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India’s Closing Auction Session Needs an Evidence-Based Reset
India introduced a new way to set the official closing prices of some stocks.
Instead of using an average price, the market now uses an auction near the end of trading.
This can help large investors buy or sell shares at a fairer closing price.
However, futures and options traders may find it harder to hedge their bets when the closing price is uncertain.
Trading in equity derivatives fell to multi-month lows in August, and there were sharp price swings near a recent expiry.
The Securities and Exchange Board of India is studying whether the new system is causing these problems.
It has already asked brokers to accept more orders during the transition and exchanges to show indicative prices.
The goal is to improve the auction without hurting trading activity elsewhere.
The Closing Auction Session replaced volume-weighted average closing prices for eligible stocks on August 3.
Equity-derivatives turnover fell to multi-month lows in August, with participants attributing part of the decline to CAS.
Sharp movements around a recent derivatives expiry intensified concerns about liquidity and hedging.
Sebi has asked brokers to accept orders during the five-minute transition into the auction from September.
The regulator should use market data to decide whether substantial design changes are needed, rather than abandoning CAS prematurely.
- Who
- The Securities and Exchange Board of India, brokers, exchanges, institutional investors, and derivatives traders are involved.
- What
- India introduced the Closing Auction Session for eligible stocks, and early signs have prompted calls for a data-based review and possible redesign.
- Where
- In India’s cash-equity and equity-derivatives markets.
- When
- CAS began on August 3; concerns emerged during its first month, and broker-order changes were planned from September.
- Why
- CAS was intended to improve closing-price discovery and help institutions execute large orders, but it may be making derivatives hedging and end-of-day liquidity more difficult.
Retain and Improve CAS
Address Liquidity Risks
Whether CAS should continue
Retain and Improve CAS
The auction can produce more robust closing prices, support institutional transactions, and reduce tracking error; abandoning it after about a month would be premature.
Address Liquidity Risks
CAS should not be preserved unchanged if data show that it is impairing liquidity, widening spreads, reducing participation, or damaging derivatives activity.
Effect on derivatives trading
Retain and Improve CAS
The concerns require rigorous measurement rather than conclusions based only on anecdotes; liquidity may have shifted to another part of the trading day.
Address Liquidity Risks
Because futures and options traders rely on the cash market for hedging, uncertainty during the auction may reduce end-of-day trading and create particular problems on expiry and index-rebalancing days.
Next regulatory step
Retain and Improve CAS
Sebi’s broker-order and indicative-price measures are useful adjustments that can preserve the reform’s benefits while operational issues are resolved.
Address Liquidity Risks
These measures should be only the beginning of a substantial review examining turnover, market depth, bid-ask spreads, hedging uncertainty, index arbitrage, and order-timing constraints.
Key facts
- Reform
- The Closing Auction Session replaced the previous volume-weighted average method for determining closing prices of eligible stocks.
- Start date
- CAS was introduced on August 3.
- Early market signal
- Equity-derivatives turnover fell to multi-month lows in August.
- Main concern
- Different price-discovery mechanisms near the close may increase uncertainty for derivatives hedging.
- Regulatory response
- Sebi has said CAS will remain but that its constraints and other issues can be addressed.
- Operational change
- Brokers were asked to accept orders during the five-minute transition into the closing auction from September.
- Exchange measure
- Exchanges introduced indicative prices.
Sources
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