Bank Stock Price Gaps Widen Post New Indian Auction System

Indian bank stocks, including IndusInd Bank and AU Small Finance Bank, registered significant discrepancies in their closing prices across the National Stock Exchange (NSE) and BSE Ltd. on Thursday. This divergence, for some like IndusInd Bank, marked the widest in over two decades, following the new closing auction system launched on August 3.

Key Price Discrepancies

• IndusInd Bank Ltd. closed at ₹1,002.9 on the NSE.
• On BSE Ltd., IndusInd Bank Ltd. dropped over 3% to ₹970.
• This created a nearly ₹33 gap, the largest in more than two decades for the stock.

Similar significant discrepancies were observed in the closing values of AU Small Finance Bank Ltd., IDFC First Bank Ltd., and Federal Bank Ltd. The BSE Bankex index initially fell by 3.3% during the auction before partially recovering to a 1.7% loss.

Auction System Under Scrutiny

The new auction system, launched on August 3, has led to unusual market movements in India’s equity and derivatives markets. Concerns are rising about its functionality and potential for manipulation, especially for smaller banks struggling with thin liquidity and the monthly expiry of the bank index.

• Dubai-based hedge fund trader Mayank Bansal noted that such a significant price dislocation between exchanges for the same stock is unprecedented in his global trading experience.
• Varun Khandelwal, founder of Bullero Capital, explained that the absence of a reliable model to predict closing prices on both exchanges during the auction window makes pure arbitrage impossible.
• Karthik P, a partner at Karna Stock Broking LLP, expressed concerns that this volatility could erode trader confidence and deter market participation.

The system, which determines end-of-day prices for over 200 stocks, has faced regulatory scrutiny. The Securities and Exchange Board of India (SEBI) has already banned two firms, including a JPMorgan Chase & Co. unit, for alleged price manipulation during the auction.

This ongoing volatility highlights the challenges presented by the new auction mechanism, prompting market participants to re-evaluate their end-of-day trading strategies and regulatory oversight.