India's new closing auction stokes sharp Nifty swings, options volatility on weekly expiry

India’s benchmark index Nifty 50 saw sharp volatility for the second day as a new mechanism to determine the closing prices of stocks with futures and options triggered wild swings on the day when weekly derivative contracts expired.

The Nifty 50 was 0.6% lower at 24,614.9 points at 3:35 p.m. when closing prices for the day are set. Just a little earlier, at 3.15 p.m, when the closing auction window opened, the Nifty 50 was down 1.25% at 24,463.45 points.

The BSE Sensex settled 0.3% lower, with the benchmarks showing a rare divergence for two consecutive days. On Monday, the Nifty closed 1.6% higher after rising 0.7% at the end of continuous trading at 3:15 p.m. IST.

“The 20-minute window when cash market trading stops makes traders blind as they cannot ascertain where the Nifty 50 will close. These two days under the new mechanism indicates that something needs to be done to fix the issues,” said Rajesh Palviya, senior vice president and head of research at Axis Securities.

Tuesday’s volatility is likely to have had an impact on options premiums, triggering unexpected losses and gains for some traders, two analysts said.

The closing index value determines the settlement of millions of rupees of option contracts on the day of the derivative expiry, the analysts said, declining to be identified as they are not authorised to speak to the media.

Under the new closing auction mechanism, which began on Monday, a 20-minute auction is held from 3:15 p.m. IST to determine closing prices, replacing the earlier methodology that calculated closing levels based on the volume-weighted average price of trades during the final 30 minutes of trading.

Since institutional buy orders are concentrated on the more liquid NSE during the thin auction window, this sharply lifts several heavyweight constituents and boosts the Nifty 50 in the closing auction window, said Santosh Meena, head of research at Swastika Investmart.

The BSE Sensex, with far lower institutional cash-market activity, does not see this, Meena said. The significant gap in closing levels of the Nifty suggests that the new system is not functioning as intended, said Vinod Nair, head of research at Geojit Investments.

“These appear to be initial teething issues in the new system and the exchanges and market regulator need to address the discrepancies,” he said.

The Association of NSE Members of India, an industry body of brokers, said it is engaging with exchanges and the markets regulator to share feedback and suggestions to further strengthen the framework.

Markets regulator, the Securities and Exchange Board of India, did not respond to an email seeking comment.