14 hrs ago
Experts Propose Hybrid Settlement to Curb Closing Auction Volatility
India’s markets use a closing auction to help set end-of-day prices.
Recently, prices moved sharply during this auction, especially when financial contracts expired.
On one Thursday, the Sensex’s estimated closing price changed by almost 4,000 points.
Fewer traders than expected also took part in the auction.
Because of this, the market regulator will review the system.
One expert suggested combining the auction price with an average price calculated over 30 minutes.
Another suggested making the cash and derivatives markets close at the same time.
Officials and market participants also discussed narrower price limits and changing how derivatives settlement prices are calculated.
The Securities and Exchange Board of India will review the closing auction session mechanism, particularly on expiry days.
The review follows sharp swings in indicative closing prices and lower-than-expected participation in the auction.
The Sensex’s indicative closing price moved nearly 4,000 points during Thursday’s weekly expiry.
Experts proposed combining the auction price with a 30-minute VWAP and aligning cash and derivatives closing times.
Other suggestions include delinking derivatives settlement from CAS, narrowing price bands and limiting auctions to stocks outside the top 500.
- Who
- The Securities and Exchange Board of India, market experts, exchanges and traders are involved.
- What
- The closing auction session mechanism is being reviewed after sharp expiry-day price swings and weak participation.
- Where
- India’s cash and derivatives markets, including the Bombay Stock Exchange and National Stock Exchange of India.
- When
- The review was announced after a month of volatility; the latest major swing occurred on Thursday, and trading-linked stocks rallied on Friday.
- Why
- Last-minute order imbalances, lower-than-expected auction participation and different closing times may be contributing to volatility.
Retain Auction Benefits
Reform the Settlement System
Role of CAS
Retain Auction Benefits
Rajesh Palviya said the closing auction brings end-of-day liquidity together and helps produce a single equilibrium price, consistent with global practices.
Reform the Settlement System
Palviya said relying entirely on the auction price for derivatives settlement can create vulnerabilities on expiry days.
Settlement pricing
Retain Auction Benefits
The current approach uses the closing auction price as a key reference for derivatives settlement.
Reform the Settlement System
Proposals include using a 30-minute VWAP for derivatives settlement while retaining the closing auction for the cash market, or delinking derivatives settlement from the auction price.
Market timing and limits
Retain Auction Benefits
The existing structure separates the closing times of cash and derivatives markets and maintains a 3% price band around the reference price.
Reform the Settlement System
Experts proposed common closing times, tighter price bands and potentially restricting the auction to stocks outside the top 500.
Key facts
- Regulator
- The Securities and Exchange Board of India is reviewing the closing auction session mechanism.
- Latest volatility
- The Sensex’s indicative closing price swung by nearly 4,000 points during Thursday’s weekly expiry.
- Participation
- Bombay Stock Exchange managing director Sundararaman Ramamurthy said closing auction participation was lower than expected.
- Hybrid proposal
- Rajesh Palviya suggested combining the closing auction price with a 30-minute volume-weighted average price.
- Timing proposal
- Tejas Shah suggested aligning the closing times of the cash and derivatives markets.
- Price-band proposal
- Market participants proposed narrowing the current 3% price band on either side of the reference price.
- Market reaction
- Bombay Stock Exchange shares rose 3.14% on Friday, while Angel One gained 4.2% and Motilal Oswal Financial Services and Groww rose about 2% each.
Sources
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