Indian market volatility eases as traders adapt to new closing auction

Volatility in Indian markets, which had stemmed this week from a new closing auction method for stocks, reduced on Thursday as traders get used to the new methodology.

The Nifty 50 index closed 0.05% higher, compared to a gain of 0.01% at 3:15 p.m. IST when the regular trading ended for stocks that have futures and options contracts tied to them.

Peer index Sensex closed 0.48% higher at 78,954.76 points, up nearly 170 points from 3:15 p.m. IST, as volatility was exacerbated by the expiry of weekly derivative contracts linked to it.

This was the biggest closing move seen in the 30-stock Sensex since the new method kicked in from Monday.

The jump, however, was not mirrored in options premiums, in contrast to what happened with the Nifty on Tuesday, when its weekly derivatives contracts expired.

The market had factored in the volatility and options premiums had jumped before the start of closing auction mechanism, two derivatives analysts said, explaining Thursday’s subdued move. The options buyers have been on the losing side, they added.

The Nifty saw abrupt swings at close during the last three days, when the Sensex was relatively stable.

Analysts attributed the divergence between the two indexes to concentration of volumes on the National Stock Exchange of India and lack of clarity over where the stocks or indexes might close.

Swings on expiry day can trigger heavy losses for options traders, particularly small retail traders, they said.

The markets regulator met top brokers on Wednesday and directed them to ensure indicative equilibrium price was continuously displayed for investors, two sources with direct knowledge of the matter said.

The regulator also urged brokers to increase retail participation in the new closing window to increase liquidity, as per the sources.

The Securities and Exchange Board of India did not immediately respond to a Reuters request for comment.

Reduced volatility on Thursday does not mean the dust has settled.

“Since it has only been a few days, it is difficult to make a judgement call on the new methodology as the market takes time to adapt,” said Raj Deepak Singh, vice president of derivatives and quantitative research at ICICI Direct.