India’s new stock closing auction: How it works and why it is struggling
The new mechanism has changed how India determines official closing prices, exposing liquidity challenges and raising questions about its early implementation
India's new stock closing auction system, introduced on August 3, has been encountering challenges since its launch, despite aims to align with global markets and reduce manipulation risks. The 20-minute auction, held after the regular trading session ends at 3:30 p.m., uses buy and sell orders to determine equilibrium prices. However, the system has struggled with thin liquidity and potential manipulation.
In its first month, the BSE Sensex index saw a 3% plunge during the auction, prompting the securities regulator to ban two firms, including a JPMorgan Chase unit, for alleged manipulation. The auction is vital as closing prices form benchmarks for various financial instruments, but its early rollout has highlighted the difficulties of transitioning to an auction-based method.
Institutional investors are hesitant to engage due to shallow liquidity and price volatility. The mismatch between cash stocks locked in the auction and derivatives trading until 3:40 p.m. also creates arbitrage complications. Liquidity issues stem from a weak securities-lending market, further fragmenting liquidity between the National Stock Exchange and BSE's separate auctions.
While the auction aligns with global practices, India needs to develop supporting infrastructure for efficient functioning.
Written by urgent.news from Hindu BusinessLine's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
