India's index-options trading faces near-term drag from new stock closing, Bernstein says

India's index-options trading faces near-term challenges due to a new closing auction system that has caused significant equity price fluctuations in the final minutes of trading, according to Bernstein analysts Manas Agrawal and Himank Sangai. The system, launched on August 3, determines the official closing price of Indian stocks with derivatives contracts, which are heavily weighted in the Nifty 50 and Sensex indices.

The closing auction system has led to a sharp decline in market participation during the last 15 minutes of trading, with volumes dropping from 10.1 percent to 1.6 percent to 2.3 percent of daily turnover on the NSE. This reduced visibility on the likely final price has resulted in sharp price swings and eroded the value of options sold by retail traders, while buyers have experienced sharp gains or losses.

Passive funds have largely avoided the closing window, but may need to participate on days when indexes are rebalanced. The thin auction liquidity has raised concerns over unexplained price swings and potential order spoofing.