India beats a hasty retreat from a crucial market reform
India’s market-closing auction reform, designed by Sebi to curb price manipulation, has faced volatility and investor backlash within weeks. The regulator may weaken or abandon it, exposing deeper problems: high securities taxes, inadequate arbitrage, shallow liquidity and restrictions on short selling. Poor coordination between fiscal and regulatory policies ultimately undermined reform efforts.
India recently halted its ambitious attempt to reform its capital markets, citing the chaos it caused. In early August, the Securities and Exchange Board of India mandated a closing auction for derivative-linked stocks, aiming to curb price manipulation. However, the 20-minute auction window led to abrupt intraday trends and skyrocketing option volatility.
SEBI eventually abandoned the reform, considering a shortened or abandoned auction, signaling a disappointing outcome. The true culprit behind the market's irrational behavior is not getting enough attention: high taxation. Tax rates, which have increased recently, discourage arbitrageurs from stabilizing prices, creating a chicken-and-egg problem.
As a result, the market has become shallower, making it even harder for traders to execute large orders without moving prices. Additionally, high transaction costs, primarily due to the securities transaction tax, have turned many day traders into net losers. The tax system, alongside SEBI's micromanagement of short selling, has contributed to liquidity issues in the cash market, affecting both small and large investors.
Written by urgent.news from The Economic Times - Top News's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
