New Stock Market Close Sees Record Low Trading

The introduction of a 15-minute closing auction session (CAS) has resulted in a dramatic drop in trading activity, marking it as the least active period of the trading day. This contrasts sharply with the previous era, where the end of the trading day was once the busiest. Foreign traders have expressed a need for market-making mechanisms to enhance auction volumes.

The CAS, rolled out recently, replaced the established 30-minute Volume-Weighted Average Price (VWAP) model. Initially applied to 213 stocks involved in derivatives trading, its objective is to mitigate end-of-day price manipulation and harmonize Indian markets with international practices. However, the transition has been challenging, characterized by subdued volumes and divergent closing prices for key indices on major exchanges.

Analysis of trading data indicates that the CAS window accounts for a mere 1.59% of the average daily volume. This is even lower than previous low-activity continuous trading windows. Some market participants attribute the low participation to the nascent stage of CAS, expecting volumes to rise as investors adapt.

Conversely, other market professionals highlight differences in market microstructure compared to global exchanges like those in the US, UK, and Hong Kong. They point to the absence of market-making during CAS in India, a feature present in other major markets to ensure tighter spreads and price stability. The limited vibrancy of the securities lending and borrowing mechanism (SLBM) in India is also cited as a contributing factor.

Discussions are underway, with some high-frequency traders requesting regulatory designation as market-makers during the auction session. This move aims to reduce price divergence observed between the continuous trading session close and the auction's conclusion. Instances of significant Nifty index movements immediately before and after CAS have been noted, underscoring concerns about price discovery in the new system.