Indian bank stocks see sharp NSE-BSE closing price gaps under new auction system

On Thursday, shares of several Indian banks traded at markedly different prices on the country’s two largest stock exchanges, signaling disarray under the newest closing auction system. IndusInd Bank Ltd. concluded at 1,002.9 rupees on the National Stock Exchange of India Ltd., whereas it slipped over 3% on the BSE Ltd. to 970 rupees.

The nearly 33-rupee discrepancy was the largest in more than two decades. Similar pronounced differences were observed in AU Small Finance Bank Ltd., IDFC First Bank Ltd., and Federal Bank Ltd.

The BSE Bankex gauge initially dropped 3.3% during the auction but later stabilized at a 1.7% decline. Some smaller banks struggled to regain value due to thin liquidity and the expiration of a 14-member bank index. On Friday, the gauge rebounded by 1% at the close. Since the auction system's introduction on August 3, India’s equity and derivatives markets have experienced unusual fluctuations, sparking concerns about the mechanism's functionality and potential for abuse.

The divergence between prices on the National Stock Exchange and the BSE has intensified scrutiny of the system.

Traders have noted the severity of the gaps, with Mayank Bansal, a Dubai-based hedge fund trader, remarking, "I trade multiple markets globally and haven’t seen such a dislocation where the same stock closes with as much as a 3% gap on different exchanges." Varun Khandelwal, founder of Bullero Capital, explained that the lack of reliable models to predict closing prices on both exchanges makes arbitrage impractical.

The auction mechanism, used to determine end-of-day prices for over 200 stocks, has faced criticism and regulatory scrutiny, with two firms, including a JPMorgan Chase unit, banned for alleged price manipulation during the auction.

Traders and market participants are losing confidence, potentially leading them to avoid the market, according to Karthik P, a partner at Karna Stock Broking LLP.