SEBI Reviews Closing Auction System Amid Market Concerns
By Market Desk
India’s SEBI is re-evaluating its new closing auction system following feedback from trading firms and mutual funds regarding implementation challenges and price discovery.
The Securities and Exchange Board of India (SEBI) is reviewing its recently introduced closing auction system, which launched on August 3rd, after market participants raised concerns. SEBI officials have initiated discussions with trading firms and mutual funds to gather feedback on the new mechanism.
SEBI Chairman Tuhin Kanta Pandey confirmed the regulator’s openness to modifying the system based on the input received. The new mechanism replaced an older method that calculated closing prices using volume-weighted average prices during the final 30 minutes of trading.
Understanding the System’s Objectives
The primary objectives for implementing this new system were:
- To enhance price discovery.
- To mitigate market manipulation.
- To align India’s market structure with international practices.
Market Participants Highlight Implementation Challenges
High-frequency trading firms have reported difficulties in borrowing stocks through India’s developing securities lending market. This limitation has restricted their ability to participate effectively in the new auction.
Some brokers have proposed specific adjustments to the system. These suggestions aim to address current liquidity challenges.
- A temporary return to the old system on days when passive funds rebalance.
- This temporary measure would remain until market liquidity improves.
Statistical Data Reveals Early Strain
Further concerns exist regarding the system’s performance later this month when global passive funds rebalance portfolios due to MSCI’s quarterly index changes. Statistical data already indicates a strain on the system’s efficiency.
Key Data Points on System Performance:
- Average turnover during the new auction window decreased by 40% compared to the final 15 minutes of trading under the previous system.
- Average traded volume of index options saw a 27% decline to 268 million contracts on the August 4th and August 11th settlement days, relative to July’s weekly average.
SEBI’s ongoing engagement with market participants underscores its commitment to refining the closing auction system. The regulator aims to ensure the mechanism effectively achieves its goals of enhanced price discovery and manipulation mitigation while addressing operational challenges.