Closing Auction Session needs market makers as price swings persist

India’s new closing system absorbed a record $4.2 billion of stock trades linked to MSCI Inc. index rebalancing on Monday. Yet the sharp price swings that have plagued it since launch persisted, underscoring a key challenge to its long-term success: the lack of market makers.

Turnover in the 20-minute window on the National Stock Exchange of India, the country’s top bourse, was 33 times the daily average since the system’s Aug. 3 debut. Even so, about 60 stocks exited the auction at their 3% price limits, with sharp swings in names including Eternal Ltd., Adani Enterprises Ltd. and Reliance Industries Ltd.

While thin liquidity has been blamed for much of the volatility seen during the auction’s first month, Monday’s price moves occurred despite the large institutional orders flowing through the mechanism. That puts the spotlight on proprietary traders, many of whom use market-making strategies that help smooth imbalances between buyers and sellers.


“The arrival of market makers could be what finally makes the auction a success,” said Mayank Sachan, chief executive officer at proprietary trading firm Zanskar Research. Without them, the auction will still produce sharp price moves despite volumes being traded, he said.

Such firms have largely stayed away from the closing auction because of several restrictions that make it difficult to short shares, limiting their ability to quote both sides of the market. Such traders account for a third of the turnover on the NSE.

The NSE’s flagship index for lenders, the Nifty Bank Index, exemplified the sharp swing. The gauge was headed for a third straight day of loss at the start of the auction, with a drop of 0.2%. By the time the window closed, the 14-stock gauge had swung to end the day 0.9% higher.

Quick-commerce giant Eternal, one of the most liquid stocks in India based on free float, closed flat on Monday despite falling 3% ahead of the auction. Index heavyweight Reliance swung from a 0.8% gain before the auction to a 0.8% loss at the close.

Under the new mechanism, buyers and sellers submit orders during a 20-minute auction, after which the exchange determines an equilibrium price that becomes the official close. That replaces the old model, where closing prices were calculated using the volume-weighted average of trades executed during the final half hour.