Closing Auction Scrutiny Deepens Following Sharp Sensex Fluctuations

MUMBAI — India’s recently introduced closing auction system is facing renewed pushback from market participants following unexplained benchmarks swings during closing sessions. The scrutiny comes after the BSE Sensex briefly plunged about 3 per cent during a 20-minute closing auction, heightening concerns over thin liquidity and potential manipulation within the trading window.

During Thursday's session, the 30-stock benchmark slumped to 74,983.19 points, marking a 2.9 per cent drop from its continuous trading level of 77,182.91 recorded at 3:15 pm. The gauge recovered most of its losses before finally closing 0.7 per cent lower for the day. Market participants noted that derivatives linked to the index experienced wild fluctuations, with far out-of-the-money put options seeing sharp spikes during the auction window before giving up gains by the close.

According to market experts, the primary trigger for the flash crash-like move in the Sensex was an index-heavyweight stock where orders were punched at the 3 per cent lower limit permitted by the auction mechanism. The system is designed to allow stock prices to move only within a 3 per cent range from the level determined at the beginning of the auction. An index of lenders also experienced a rapid drop, with the BSE Bankex indicating a fall of 3.3 per cent before closing 1.7 per cent lower. The resulting uncertainty pushed a gauge of 30-day ahead volatility up by 4.8 per cent, the highest jump in over a month.

The transition to the auction-based mechanism for determining closing prices for over 200 stocks was implemented earlier this month to align Indian markets with global standards and curb price rigging. However, the system has faced continuous challenges. Earlier this month, the Securities and Exchange Board of India (SEBI) issued an initial order naming Copthall Mauritius Investment Ltd and Mansi Share and Stock Broking Pvt for allegedly manipulating the auction window on August 13 to benefit their derivatives positions.

Despite mounting trader concerns, SEBI Chairman Tuhin Kanta Pandey stated after the market closed on Thursday that the regulator is not considering any immediate rethink or changes to the system. He noted that the mechanism is working and that brokers and stakeholders will assist in increasing market participation. BSE did not immediately respond to queries outside of regular business hours.

Attention now turns toward an upcoming test for the market: MSCI Inc’s month-end index rebalance. Changes from the August review will be implemented at the close of trading, requiring passive and exchange-traded funds tracking MSCI benchmarks to adjust their portfolios to match the new composition and weights.

"The recent volatility observed during the closing auction window highlights the operational challenges that accompany major structural market reforms. While aligning with global standards is essential for Indian capital markets, ensuring adequate liquidity and robust safeguards against price manipulation remains critical. Market participants and regulators will need to closely monitor these transition phases, especially ahead of major index rebalancing events, to maintain investor confidence and market stability." — Dr. Shishir Gupta, Founder & CEO, StartupLanes