India’s New Stock Closing Auction Faces Thin Liquidity and Price Volatility

India’s newly introduced auction-based system to determine end-of-day prices for over 200 stocks continues to produce unexpected swings nearly a month after its launch. The overhaul was intended to improve price discovery, curb manipulation, and bring India in line with major global markets like the New York Stock Exchange, Nasdaq, London Stock Exchange, and Australian Securities Exchange.

Before August 3, equities traded continuously from 9:15 a.m. to 3:30 p.m. Mumbai time, with the official close calculated as the volume-weighted average price of all trades executed during the final 30 minutes of the session. Under the new system, eligible stocks enter a dedicated 20-minute closing auction session after continuous trading ends. From 3:15 p.m. to 3:35 p.m., buy and sell orders are collected without being immediately matched. The exchange then determines an equilibrium price that maximizes executable volume, and the official closing price is published after the auction concludes.

However, the early rollout has highlighted significant challenges. Recently, the BSE Sensex index briefly plunged about 3% during the 20-minute closing auction on a Thursday, renewing concerns over thin liquidity and potential manipulation. Two weeks prior, an incident on the BSE prompted the securities regulator to ban two firms, including a unit of JPMorgan Chase & Co., from the market for allegedly manipulating the auction system. According to SEBI, the firms placed outsized orders in Sensex stocks during the closing auction—accounting for more than 90% of orders in some identified securities—and later canceled large portions to influence indicative closing prices without fully executing trades. A spokesperson for JPMorgan declined to comment.

Market participants note that India’s closing auction is caught in a chicken-and-egg situation. Institutional investors remain wary of routing large orders through the window because trading is shallow and prices can move sharply, yet their absence prevents the auction from developing the necessary depth for stable price discovery. Turnover in the closing auction on the National Stock Exchange has averaged about 12 billion rupees ($126 million) since introduction, a fraction of historical volumes during the final 20 minutes of continuous trading.

Additional structural constraints include a relatively shallow securities-lending market, which makes it harder for high-frequency and arbitrage firms to short stocks and provide two-way liquidity. Liquidity is also fragmented because the NSE and BSE conduct separate closing auctions. Furthermore, while cash stocks are locked into the closing auction at 3:15 p.m., derivatives continue to trade until 3:40 p.m. This creates a mismatch where investors can respond to futures and options movements but have limited ability to immediately hedge using the underlying shares.

Despite these early hurdles, closing auctions are standard across many developed markets, where initial price swings eventually peter out as systems mature. SEBI first proposed the framework in 2024 following requests from index-tracking passive funds aiming to minimize tracking errors. As market participants adapt to the new timetable, trading strategies and hedging approaches are undergoing a period of reassessment.

"The transition to a structured closing auction is a necessary structural evolution for Indian capital markets to align with global standards and reduce index-tracking passive fund errors. However, early implementation hurdles such as fragmented exchange liquidity, cash-derivatives timing mismatches, and shallow lending markets highlight the need for robust institutional participation and deeper supporting infrastructure. As market participants adapt their strategies, regulatory vigilance will be crucial to ensure fair price discovery and restore market confidence." — Dr. Shishir Gupta, Founder & CEO, StartupLanes