India’s Closing Auction: Reform, Liquidity & Transparency Concerns
By Market Desk
India’s new Closing Auction Session aims to improve price discovery but faces challenges in liquidity, transparency, and price bands. Learn about the operational improvements needed.
India has introduced a new Closing Auction Session (CAS) as a vital market reform, specifically designed to improve closing price discovery. While necessary, several operational aspects require refinement for its optimal functioning.
Understanding the CAS Mechanism
The Closing Auction Session (CAS) operates daily from 3:15 pm to 3:30 pm, a defined period intended to gradually narrow the liquidity pool. This structured approach allows serious, delivery-based investors to determine the equilibrium price, aiming for greater accuracy in market closure.
A primary concern highlighted is the significant reduction in liquidity during this session. Intraday and proprietary traders are largely excluded unless their transactions are delivery-based. Proprietary traders can also take counter-positions in the F&O market, which remains open until 3:40 pm, further shrinking the available liquidity pool within CAS.
Key Areas for Improvement
Operational improvements are crucial for the Closing Auction Session to function optimally, addressing issues such as transparency, liquidity, and safeguards against market volatility. The current lack of real-time session depth, which would show accepted volume or traded quantity at various prices, particularly hinders informed decision-making for market participants, especially F&O traders.
Furthermore, the existing static price band of +/-3% of the reference price is suggested for reconsideration. A dynamic price band, potentially 1%, similar to those in the F&O segment, could be more suitable, given that price movements in the last 15 minutes are generally not significant.
To deepen liquidity during the CAS, a more robust Securities Lending and Borrowing Mechanism (SLBM) framework is essential. This framework should be driven by long-only funds, mutual funds, insurance companies, and pension funds.
Volatility and Margin Trading Facility Impact
Excessive volatility during the last 30 minutes of trading could trigger sharp sell-offs. This directly affects closing prices and increases risks for retail investors active in the derivatives market, particularly concerning the Margin Trading Facility (MTF) segment.
The Path Forward for Market Integration
Despite these identified challenges, the Closing Auction Session is widely viewed as a forward-looking reform, implemented after extensive consultations. Future efforts should concentrate on further enhancing the system and integrating various market segments to ensure its efficacy and robustness.