The market participants received some relief as the volatility in the closing price of Nifty 50 due to recently launched closing auction session (CAS) reduced. The index moved upwards by 54 points on Wednesday during the closing auction session, substantially lower than the spikes of 200 and 150 points seen in the previous two trading sessions.
However, the 54-point spike was enough to change the course of the index during the entire trading session as Nifty 50 closed 10 points up from its previous close after being about 45 points down at the start of the closing auction. The volume and value of shares traded during CAS saw a decline of 7% and 10% respectively, compared to Tuesday’s trading session.
Experts expect volatility due to the closing auction to reduce over time as the market participants adjust to the newly introduced closing price mechanism. Gaurav Arora, head of research, SAHI said that as familiarity with the new mechanism grows and execution strategies evolve, the magnitude of spikes during CAS is likely to reduce. He also believes that improved participation and liquidity during the auction could also reduce such sharp changes.
A senior official from one of the leading brokerages said that while traders new to the pricing mechanism suffered losses in the first two days, some market participants who adjusted their option positions to the mechanism also gained amidst volatility. He added that the new pricing mechanism is likely to affect auction traders the most and will not impact the larger trading community.
He added that CAS is a standard practice in global markets and helps institutional investors execute bulk orders and avoid market volatility. He suggested traders to close their positions by the start of CAS and renew them in the 10-minute window after its end while the derivative markets remain active and hoped that more traders will get used to the new mechanism with time and experience.
After seeing lower volatility on Wednesday, market participants are shifting their focus to the closing auction on BSE during Thursday’s trading session, especially as it will also see the weekly expiry of derivative contracts. Arora said that while BSE’s auction mechanism has been relatively smoother than NSE, the weekly expiry of derivative contracts would be an important test. While expecting some volatility, he does not see a sharp spike in BSE during the auction.
Anand James, chief market strategist, Geojit Investments said that the disparity due to CAS could persist in the upcoming trading sessions as market participants are still uncertain about the final closing price once continuous trading stops.
The new mechanism has also led to concerns among some experts on the possibility of its misuse. A source close to a brokerage association said that the manner of implementation of CAS could increase the potential for market discrepancies as large institutional investors take positions in cash and derivative markets at the cost of retail investors. He expects a sharp spike in BSE Sensex in Thursday’s trading session during CAS due to weekly expiry of derivative contracts.
Arora believes that an immediate consequence of volatility due to CAS could be a decline in options trading volumes, particularly on expiry days as the uncertainty around the final closing price makes it more difficult for traders to accurately manage expiry-day positions.
Further, it could also discourage participants who trade using collateral or rely on precise end of day pricing for risk management. He added that the initial frictions could ease with time as liquidity improves and market participants adapt to the new mechanism, allowing its benefits to become more evident.
Besides the upward spike and volatility due to closing auction in NSE, the other benchmark index BSE Sensex closed 152 points higher than its previous close. The banking sectoral index remained flat, increasing by 0.02%, as the RBI MPC meeting ended with no change in rates, in line with market expectations.