New closing auction pushes options traders to smaller bets, heavier hedges
Options turnover fell 20% in August, the first month of the new mechanism, while algorithmic traders say they have sharply reduced activity amid volatile closing prices.
India's new closing auction is causing options traders to adjust their strategies, with market participants reducing positions and adding hedges as volatile price swings in the final 15 minutes make closing levels difficult to predict, traders reported. Average daily options turnover, which constitutes most trading in India, declined 20% month-over-month in August, according to Jefferies, the first month since the auction's implementation, while some algorithmic traders said they cut activity by 35%-40%.
Meanwhile, average daily cash equities turnover on the National Stock Exchange fell 0.6%. The auction, introduced on August 3, determines official closing prices through a brief end-of-day auction, an approach also used in other major markets to enhance price discovery. However, its initial month in India has highlighted issues such as discrepancies in index closing levels across the country's two primary exchanges, sharp price swings in options, limited participation, and potential manipulation risks.
Regulators have affirmed that the new mechanism will remain in place, with operational issues to be reviewed. The National Stock Exchange reported $4.1 billion of trades during the closing auction on August 31, significantly higher than the average $128 million on other trading days. When the Sensex monthly options expired on August 27, a trader from Surat, Rohit Tiwari, reported a loss expanding to ₹3,88,000 during the auction, up from about ₹50,000 before the event.
Despite smaller positions and hedges, he also incurred ₹2,00,000-₹3,00,000 in losses on Nifty's monthly expiry that week. Tiwari stated that he is now maintaining smaller options positions and includes additional hedges in every trade. IT-company owner Nishant Rakesh, who trades using margin against a portfolio of stocks and bonds, found the final phase of the trading day akin to a blind bet due to the uncertainty, noting that the period before the auction, followed by the fluctuating prices during the auction itself, can lead to stop-loss and risk management measures failing at the most critical moment when traders need protection the most.
Quantitative trading firms are also scaling back. Tanmay Kurtkoti, founder of QCAlpha Advisors, reported a reduction in expiry-day volumes by 70%-75%, particularly during the auction window, stressing the opacity issue, saying, "I don't know whether the trades I push during the auction will be executed." Market analytics platform CEO Vishal Mehta confirmed cutting down options positions by 35-40%.
"We cannot afford many open positions after 3 p.m. IST due to the risk of our set stop-loss levels being breached."
Written by urgent.news from Hindu BusinessLine's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
