New Stock Exchange Auction System Causes Market Confusion in Mumbai

Market participants faced confusion during the new auction system's debut. Indices and stock values diverged significantly, catching traders by surprise. The new system determines closing prices through a separate auction process. This change aims to create more robust closing prices for derivatives. Tuesday's derivatives expiry will be a key test for the new system.

Mumbai: Confusion gripped market participants in the first trading session of the exchanges' new auction system on Monday as values on indices and stocks across bourses diverged unprecedently amid the abrupt spike in the Nifty, catching traders off guard.

The Nifty ended at 24,774.30, up 390.70 points or 1.60%, following a late surge of 0.8% at around 3:28 PM. The Sensex ended at 78,639.03, up 544.39 points or 0.70%. Usually, the difference in percentage gains between the indices is not more than 5-10 basis points.

The new closing auction system changes the way the official closing prices of stocks in the futures and options (F&O) segment are determined. Until last week, the closing price-used to calculate index closing levels, value mutual fund portfolios and settle derivatives contracts-was based on the volume-weighted average price (VWAP) of trades during the last 30 minutes of trading. From Monday, the closing price is determined through a separate closing auction, a move aimed at making the closing price more robust and less susceptible to the impact of large last-minute orders.

"The intention of launching the closing auction is the step in the right direction but clearly, there seems to be a missing link in its implementation going by how prices have played out on the first day," said Siddarth Bhamre, head of institutional research at Asit C. Mehta Investment Intermediates. The new system is likely to face its first major test on Tuesday, when NSE's weekly derivatives contracts expire. Traders will be watching closely to see how the closing auction influences settlement prices.

Had Monday's late sharp move happened on an expiry day, its impact on traders' position gains and losses would have been far greater because the official closing price determines the settlement of stock futures and options, said brokers. NSE had not commented on the sharp late-session price movements till the time of going to press, while market participants said there was no indication of a technical glitch.

One theory for Monday's divergence is that a large imbalance of institutional buy orders in Nifty heavyweight stocks emerged during the closing auction, pushing up their closing prices and lifting the index disproportionately.

Under the previous system, such orders would have been executed over the last 30 minutes of trading. The new framework concentrates them into a single closing auction, potentially amplifying the impact of large orders.