Understanding the final 15-minute volatility trend in the Indian stock market
This new mechanism, which operates as a separate 20-minute session to collect buy and sell orders and determine a single official closing price, has led to sharp index movements, such as the BSE Sensex dropping over 400 points in five minutes
India's recently implemented closing auction session (CAS) for Futures and Options (F&O) stocks is inducing considerable volatility in indices during the session's final 20 minutes, with instances of sharp point drops observed. This new mechanism aims for a fair and transparent closing price by aggregating all buy and sell orders, replacing the older Volume-Weighted Average Price (VWAP) method. However, it has surfaced issues like disparities in index closing levels across exchanges, abrupt price swings in options, and reduced trading participation, leading to trader concerns about liquidity potentially facilitating manipulation. While broader market sentiment is weighed down by rising crude oil prices and declines in IT stocks, the banking sector is showing resilience attributed to substantial foreign exchange inflows.
India's recently implemented closing auction session (CAS) for Futures and Options (F&O) stocks is inducing considerable volatility in indices during the session's final 20 minutes, with instances of sharp point drops observed. This new mechanism aims for a fair and transparent closing price by aggregating all buy and sell orders, replacing the older Volume-Weighted Average Price (VWAP) method. However, it has surfaced issues like disparities in index closing levels across exchanges, abrupt price swings in options, and reduced trading participation, leading to trader concerns about liquidity potentially facilitating manipulation. While broader market sentiment is weighed down by rising crude oil prices and declines in IT stocks, the banking sector is showing resilience attributed to substantial foreign exchange inflows.
India's recently implemented closing auction session (CAS) for Futures and Options (F&O) stocks is inducing considerable volatility in indices during the session's final 20 minutes, with instances of sharp point drops observed. This new mechanism aims for a fair and transparent closing price by aggregating all buy and sell orders, replacing the older Volume-Weighted Average Price (VWAP) method. However, it has surfaced issues like disparities in index closing levels across exchanges, abrupt price swings in options, and reduced trading participation, leading to trader concerns about liquidity potentially facilitating manipulation. While broader market sentiment is weighed down by rising crude oil prices and declines in IT stocks, the banking sector is showing resilience attributed to substantial foreign exchange inflows.
One month into the introduction of the closing auction session (CAS) in India, the new method to determine the closing prices for Futures and Options (F&O) stocks has been creating volatility in the indices in the last 20 minutes of trading.
In the final minutes of Thursday’s session, the BSE Sensex slumped over 400 points in just five minutes between 3:25 PM and 3:30 PM.
The CAS operates as a separate 20-minute session from 3:15 PM to 3:35 PM, during which the exchange collects buy and sell orders and then determines a single official closing price for the stock. The new mechanism does not offer visibility into the last 20 minutes of trading. It was introduced to provide a fair and transparent closing price.
According to Jeferies, the average daily options turnover, which accounts for most trading in India, fell 20 per cent month-on-month in August.
The session's first month in India has exposed problems including differences in index closing levels across the country’s two main exchanges, sharp swings in options prices, and limited participation.
The CAS replaces the old Volume-Weighted Average Price (VWAP), which averaged out trades over the last 30 minutes. Since the CAS collects all buy and sell orders and then finds a single price, the official closing price is determined by the total supply and demand at the end of the auction, which can diverge sharply from the last trade price seen during continuous trading.
If some traders choose to end the session early and not participate in the auction window, it also causes a significant drop in trading volumes. If the market is thin with lower liquidity, large orders can cause a disproportionate impact on the price, which can cause vertical swings. Traders raised the same concerns, highlighting that low liquidity can leave the auction vulnerable to manipulation.
With rising crude oil prices and losses in IT stocks, the markets have generally been on a downward trend. The 30-share BSE Sensex dropped 417.49 points or 0.55 per cent to close at 76,152.86 on Thursday. The NSE Nifty 50 slipped 41 points or 0.17 per cent to settle at 23,873.45.
"Stubbornly high crude oil prices continue to act as key overhangs for the domestic market," said Vinod Nair, Head of Research, Geojit Investments Ltd.
However, bank stocks are seeing an upward swing, owing to an overwhelming inflow of forex under the RBI's FCNR(B) scheme.