The Indian stock market continued to witness a sharp divergence between its two major indices on Wednesday, with the Sensex rising over 400 points while the Nifty traded flat, as traders remained cautious following the introduction of the Closing Auction Session (CAS).
The new CAS system was introduced on Monday, following which Nifty recorded a sharp surge of 200 points in the last two minutes of the session, while Sensex comparatively escaped the sharp volatility. Tuesday's session saw a mixed opening on Nifty’s expiry day, although both the indices later closed in the red. Nifty, however, fell deeper, dropping 159 points to end the session at 24,615, while Sensex closed with lesser losses at 78,429.
On Wednesday, Sensex traded over 450 points higher to trade above 78,800, while Nifty 50 was flat, to trade just 20 pts higher, as seen at 11.07 am. This comes after the Reserve Bank of India (RBI) announced its MPC’s decision to keep its policy repo rate unchanged.
What NSE and BSE said on CAS
The National Stock Exchange (NSE) said Monday's CAS recorded higher trading volumes than the exchange's long-established pre-open call auction earlier in the day. The exchange said it and peer BSE have separate order books for the auction, which could lead to differing prices for stocks.
Under the newly launched CAS, continuous trading in eligible stocks ends at 3.15 pm, before the market shifts into a 20-minute auction that sets the official closing level. On its first day of launch, the auction drew strong participation, with 515 trading members placing orders for 56,773 unique PANs, the NSE said. BSE, meanwhile, said that the exchange saw active participation from over 400 trading members in more than 200 scrips on the launch day.
Also read | Nifty's value doesn't change suddenly at 3:30 pm, NSE clarifies amid CAS confusion
Since many Nifty stocks are part of the F&O list, the closing auction price of these stocks directly affects the final index level. That is why the Nifty can move sharply near the close, even after regular continuous trading in those stocks has ended.
The new CAS system is likely to amplify late-session swings by making closing prices more sensitive to large institutional flows, aggressive buying, short-covering and repositioning in heavyweight stocks, Reuters quoted Hariselvan Radhakrishnan, founder and chief executive of HST Wealth, as saying.
“The significant gap between the 3:30 p.m. and 3:40 p.m. closing prices of Nifty stocks and the index, along with the divergence with Sensex, suggests that the new system is not functioning as intended, resulting in heightened price volatility,” said Vinod Nair, Head of Research at Geojit Investments. He added that this has triggered forced square-offs of positions, particularly among retail investors, ahead of the 15 minutes blind derivatives window closing session.
The analyst noted that these appear to be initial teething issues in the new system and the exchanges and market regulator need to address the discrepancies. Currently, the impact is limited to the F&O segment of trading stocks and main indices. Importantly, these are not fundamental structural concerns and are likely to be brought under control, he said, adding that the broader economic and financial outlook remains solid and does not alter the view of long-term investors. The current volatility is expected to reverse as the exchanges return to their normal operating structure.
Every market that has adopted a closed auction for the first time has experienced this brief lag, which always closes quickly, said V Shunmugam, Partner at MCQube.
Also read | Why stock market's CAS Day 1 hiccups will fade within a few sessions
Notably, market participants will actively watch how Nifty 50 and Sensex react during the CAS session of Wednesday, which would be the first one after RBI MPC meet outcome.
