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Informist, Thursday, Dec. 5, 2024

 

MUMBAI – The Securities and Exchange Board of India Thursday proposed the introduction of a close auction session for the equity cash market. "Some of the major passive funds tracking international indices have suggested the need to introduce a closing auction mechanism in India to determine the closing price of stocks in the equity cash market," the market regulator said in a consultation paper. There is scope for index tracking differences amongst passive funds as stock exchanges do not support execution at closing price, SEBI said.

 

The regulator also noted that major jurisdictions around the world have a closing auction mechanism. Currently, the closing price of stocks in India is determined by the volume weighted average price in the last thirty minutes of the trading session. This mechanism helps in determining a fair market closing price, but does not enable interested buyers and sellers to trade at the exact closing price of the day.

 

On days when major events take place, say index rebalancing or derivatives expiry, the current closing price mechanism leads to significant volatility in prices and there are risks such as large orders not being completed. On the day of index rebalancing in May by MSCI and in June by FTSE, volatility of Nifty 50 constituents during the last half an hour of trade was higher than the observed volatility from 0915 IST to 1430 IST, SEBI said.

 

SEBI has made a number of proposals for the close auction pricing system. The close auction session might be introduced as a call-auction mechanism to determine the closing price of an equity, replacing the current volume weighted average price mechanism. This can be implemented as a separate session of 15 minutes from 1530 IST to 1545 IST and can be applied in a phased manner. In the beginning, this system could be applicable only to stocks on which derivatives are available, so that it would be offered only on stocks which have sufficient liquidity. 

 

The market regulator has proposed two mechanisms--one with four sessions and an alternative with three sessions for the close auction. For both, the SEBI has proposed that the closing prices of stocks be determined through the equilibrium price mechanism at which the maximum volume is executable. If no equilibrium price is discovered, then the reference price would itself be the closing price for the day, SEBI said.

The first mechanism will be split into four sessions – a reference price determination period of one minute from 1530 IST, an order input period for six minutes from 1531 IST, a no-cancellation period of four minutes from 1537 IST, and a trade confirmation and order matching period of four minutes from 1541 IST. In the first stage, a 5% upper and lower band may be applied from the reference price. The price limits for new orders in the second stage would be between the highest bid and lowest ask, as recorded at the end of the order input period. No orders can be amended or cancelled in this session, the SEBI paper proposed.

 

An alternative to this mechanism would be a three-session mechanism for 15 minutes, same as above but without a no-cancellation period. This would be a reference price calculation period of one minute from 1530 IST, an order input period of 10 minutes from 1531 IST, and a trade confirmation and order matching period of four minutes from 1541 IST.

 

During the execution of orders, limit orders will be given priority over market orders and the sequence of order execution in the new session shall be similar to the priority of the pre-open call auction session. A limit order will be executed only if the price matches the price specified by the investor and a market order is placed based on the current price. Orders which were not executed during the market hours will be automatically carried forward to the close auction session. Such orders will be treated as limit orders and would have higher time priority than limit orders placed during the close auction system, the regulator said.  End

 

Reported by Akash Mandal

Edited by Ashish Shirke

 

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