The Securities and Exchange Board of India (Sebi) has directed brokers to improve retail investor involvement in the closing auction session to reduce market volatility. This follows reports of liquidity shortages and large price swings during the final minutes of trade that have impacted index derivatives.
The Securities and Exchange Board of India (Sebi) is working with stockbrokers to boost retail participation in the closing auction session. This session, which happens between 3:15 pm and 3:30 pm, has recently faced challenges with sharp price movements and low liquidity. The regulator's push aims to ensure that prices during the market close accurately reflect broader market sentiment rather than being driven by small, sudden trades.
Impact on Arbitrage Funds and Liquidity
A major hurdle identified by brokers is the timing of the continuous trading session, which ends at 3:15 pm. Arbitrage funds, which manage roughly ₹3.4 trillion in Indian markets, rely on executing simultaneous buy and sell trades to capture price differences. Because these funds cannot guarantee execution prices or quantities in the current auction format, they are largely staying away. This absence reduces the overall liquidity needed to absorb large orders, especially on days when indices are rebalanced or during heavy institutional selling. Without these funds, the market may see more erratic price changes in the final minutes of trade.
Divergence in Index Movements
Market data has recently shown significant differences in how the Nifty 50 and the Sensex behave during the closing minutes. For instance, the Nifty 50 recently experienced a rapid 200-point jump in just two minutes during the auction session, pushing its daily gain to 1.6%, while the Sensex rose by 0.7%. On Tuesday, the Nifty 50 closed down 0.64% at 24,614.9, whereas the Sensex fell 0.27% to 78,428.95. Such gaps create confusion for investors and complicate the pricing of index-linked products.
Risks During Option Expiry
There is growing concern regarding liquidity on the BSE, particularly for the Sensex options expiry. On Tuesday, the auction value on the BSE was recorded at ₹9.4 crore, which is very low when compared to the ₹1,542.4 crore recorded on the National Stock Exchange (NSE). This thin liquidity makes it easier for prices to swing wildly. In one instance, a Nifty call option closed at ₹164.85, significantly higher than its volume-weighted average price of ₹91.68 before the auction. This uncertainty is causing some investors to avoid trading during the final minutes entirely.
Investors should keep an eye on how Sebi addresses the operational concerns raised by brokers, particularly regarding the timing and execution certainty for large institutional players. Any updates from the regulator regarding changes to the auction mechanism or additional guidelines for brokers will be important to track for market stability.