Addressing questions on the spikes in benchmark indices during closing auction sessions (CAS), SEBI Chairman Tuhin Kanta Pandey said that participation and effectiveness of showing the indicative price are the biggest keys for the newly introduced mechanism to succeed.
He was speaking at the Global Commodity Conclave organized by Multi Commodity Exchange (MCX) held in Mumbai.
Pandey emphasized on the importance of more investors understanding the new mechanism and said that increase in number of trading platforms showing indicative prices will help to allay uncertainties in the mind of investors.
He further explained the importance of CAS and called it a micro-structural reform which has been already implemented in developed markets like Japan, USA, Germany, Australia and Europe.
Noting the increase in participation of mutual funds in CAS from about 7% to above 20%, he said that the new mechanism will help passive funds with a single price to calculate NAVs and reduce their tracking errors.
“The earlier system increased the chances of manipulation due to last minute trades having a disproportionate impact on the closing price, making transaction execution difficult. The random close in CAS helps to reduce such manipulations,” Pandey added.
Pandey defended the new mechanism, pointing to the reduction in the magnitude of spikes during CAS in both the benchmark indices, BSE and NSE. He called the increase in participation of mutual funds and proprietary traders (especially during expiry days) as positive signs and asked market participants to be patient as new reform takes time to settle while adding that the regulator may tweak the framework, if required.
Pandey also informed that the regulator is looking at closing operational friction points in registration, block deal framework to enhance ease of business among FPIs in equity markets.
Besides this, in order to develop the commodity market, the regulator is focusing on broadening the investor base by allowing access to FPIs to the commodity indices and physically settled non-agricultural derivative contracts alongside increasing awareness among farmers, farmer producer organizations, MSMEs hedgers and other market users.