Nifty's sharp closing move on Monday, reflects lack of buyers and sellers at right time, not flaw in new closing auction system: Expert
Mumbai, August 4
The nearly 200-point jump in the Nifty during the final minutes of trading on Monday, the first day of the National Stock Exchange's new Closing Auction Session was primarily the result of an imbalance between buyers and sellers, and not because there was a problem with the new auction mechanism, according to market expert V. Shunmugam, Partner at MCQube.
In an exclusive conversation with ANI, Shunmugam said the contrasting movement in the Nifty and Sensex on the first day surprised many market participants. While the Nifty moved sharply higher during the closing auction, the Sensex ended lower.
Explaining the reason in simple terms, he said stock prices in the closing auction are determined by the number of buyers and sellers available at that time. If there are many buyers but fewer sellers, prices move higher. If there are more sellers than buyers, prices may fall.
"So it might be that on the NSE there were too many buyers and not much supply of the shares on the platform as a result of which the shares jumped. But on the BSE platform it must be that there are less buyers but there are too many sellers on the platform," he said.
According to him, the difference also reflects the varying levels of liquidity on the two exchanges. He noted that the cash market is stronger on the NSE, while liquidity on the BSE cash segment has been weakening over time.
He said the new Closing Auction Session has been introduced mainly for passive investors, such as index funds and institutional investors, who try to match the performance of benchmark indices as closely as possible. These investors typically place their orders near the market close, resulting in a large number of buy or sell orders entering the auction at the same time.
On Monday, the National Stock Exchange (NSE) implemented the first phase of its new Closing Auction Session (CAS) for F&O-eligible stocks.
Under the new system, the closing price is no longer calculated using the last 30 minutes' Volume-Weighted Average Price (VWAP). Instead, it is determined through a dedicated closing auction held after regular trading ends at 3:15 pm.
On the first day of implementation, the Nifty 50 jumped nearly 200 points during the closing auction, while the Sensex moved lower, creating an unusual divergence between the two benchmark indices and drawing attention from market participants.
Shunmugam stressed that it would be premature to judge the success of the new system based on its first day.
"It is too early to decide on one day to say that it is working properly or not properly," he said.
He added that similar closing auction systems have been in use for years in major global markets, including Hong Kong, New York, London, Singapore, South Africa and Brazil.
According to him, India introduced the system later than many developed markets, even though it has become a global standard.
Shunmugam also said he believes the new mechanism is better than the earlier method of calculating closing prices using the Volume Weighted Average Price (VWAP).
He said the current system should continue, although some improvements could make it stronger. One suggestion is to strengthen the method used for calculating the reference price before the auction.
Another is to prevent companies from releasing important financial announcements during the closing auction window, as such disclosures could influence prices at that time.
On whether investors should expect similar sharp moves every day, Shunmugam said the first day's volatility was likely a temporary adjustment.
"I believe what happened yesterday is a teething trouble... by Thursday or Friday, I'll see the pricing mechanism stabilizing," he said.
He compared the current situation with the introduction of the opening auction mechanism several years ago, saying the market took some time to adjust then as well.
Shunmugam added that the Closing Auction Session has been introduced mainly to help passive investors and foreign institutional investors obtain a more accurate closing price for their investments. As market participants become more familiar with the new process, he expects price discovery during the closing auction to become smoother and more stable.
— ANI
Reader Comments
As someone who trades in both US and Indian markets, this is a welcome change. The closing auction is standard practice in NYSE and Nasdaq. The initial volatility is normal—give it a week and it'll stabilize. Good analysis by the expert.
Bhai, 200 point jump in last few minutes? That's scary for retail investors who don't understand these mechanisms. SEBI should ensure more awareness campaigns before implementing such big changes. Not everyone is a market expert! 😟
The expert makes a valid point about liquidity differences between NSE and BSE. But I'm curious—why did NSE introduce this only for F&O stocks first? Shouldn't they test it on less volatile stocks before rolling out to the main indices?
Interesting to see India modernizing its market infrastructure. The suggestion about restricting corporate announcements during the auction window is particularly smart—it prevents manipulation. Let's wait and see how this plays out by Friday.
As a passive investor who puts money in index funds, this is actually good news for us! Earlier the VWAP system could be gamed by big players. Now the auction gives a fairer closing price. But yes, the first day jitters are understandable. 😊
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