2 days ago
MSCI Rebalancing Tests India’s New Closing Auction System
MSCI is changing which companies are included in a stock-market index.
Four companies are expected to join, while three others are expected to leave.
Eternal is expected to receive a larger share of the index.
Investment funds that follow the index will need to buy or sell these stocks.
This will happen near the end of trading on Monday, August 31.
It is the first major test of a new system called the Closing Auction Session.
The system finds one official closing price at 3:30 PM.
Experts worry that there may not be enough buyers and sellers to complete all trades, which could cause price swings or tracking errors.
Laurus Labs, Lenskart Solutions, Adani Energy Solutions and Billionbrains Garage Ventures are set for inclusion in the MSCI Standard Index.
Balkrishna Industries, SBI Card & Payment Services and Astral are scheduled for exclusion, while Eternal’s index weighting will increase.
The rebalancing will occur near the close of trading on Monday, August 31, using the new Closing Auction Session.
The Closing Auction Session sets a single equilibrium price at 3:30 PM, after Futures & Options trading ends at 3:15 PM.
Limited liquidity could cause volatility, incomplete order matching and tracking errors, especially for stocks in the Futures & Options segment.
- Who
- MSCI, passive funds, market participants, quant analysts and the companies affected by the index changes.
- What
- An MSCI Standard Index rebalancing will add four stocks, exclude three and increase Eternal’s weighting.
- Where
- In the market through the new Closing Auction Session; the article identifies Mumbai as the dateline.
- When
- Near the close of trading on Monday, August 31; the official closing price will be discovered at 3:30 PM.
- Why
- Passive funds must adjust their holdings to follow the revised index, creating potentially large inflows and outflows.
Expected orderly rebalancing
Liquidity and volatility risks
Stocks outside the F&O segment
Expected orderly rebalancing
Market participants and quant analysts expect rebalancing in stocks outside the Futures & Options segment to proceed broadly as it did in the past.
Liquidity and volatility risks
The articles do not identify a specific disruption for these stocks, but completion still depends on available participation and liquidity.
Stocks in the F&O segment
Expected orderly rebalancing
Passive funds can place orders during the post-3:15 PM window and use the auction to seek the official closing price without immediately creating a tracking error.
Liquidity and volatility risks
Stocks in the Futures & Options segment could see increased volatility, and trading before 3:15 PM or incomplete matching afterward could create tracking errors.
New Closing Auction Session
Expected orderly rebalancing
The single-equilibrium-price mechanism is intended to reduce tracking errors associated with the earlier volume-weighted average price mechanism.
Liquidity and volatility risks
Insufficient institutional, retail and proprietary participation could prevent large orders from being fully matched, forcing some trades into the next session and potentially causing tracking errors.
Key facts
- Index additions
- Laurus Labs, Lenskart Solutions, Adani Energy Solutions and Billionbrains Garage Ventures, the parent company of Groww.
- Index exclusions
- Balkrishna Industries, SBI Card & Payment Services and Astral.
- Higher weighting
- Eternal is expected to receive potential inflows of about $650 million.
- Addition inflows
- Each of the four additions could see potential inflows of approximately $280 million to $400 million.
- Exclusion outflows
- Each of the three exclusions could face potential outflows of roughly $110 million to $150 million.
- CAS timing
- Orders can be placed from 3:20 PM to 3:30 PM; order matching and closing-price discovery occur from 3:30 PM to 3:35 PM.
- F&O timing
- Trading in the Futures & Options segment ends at 3:15 PM.
Sources
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