Why Nifty and Sensex diverged after launch of new auction mechanism

On the first day of implementation, 515 trading members participated, placing orders on behalf of 56,773 unique PAN holders — higher than participation in the pre-open auction session — indicating strong initial acceptance of the new closing auction mechanism. The Closing Auction Session (CAS), introduced by stock exchanges on Monday (August 3) for cash market stocks with derivatives, got off to an unexpected start. In its first two days, the NSE Nifty, the BSE Sensex and several stocks ended with divergent closing prices. Instead of determining the closing price based on the volume-weighted average price (VWAP) of trades during the last 30 minutes of trading, the closing price is now discovered through a 20-minute auction held between 3:15 pm and 3:35 pm. The move aims to improve transparency, strengthen price discovery and reduce the scope for price manipulation at the close. For stocks without derivatives, the existing volume-weighted average price mechanism continues.After its introduction, Nifty showed a rise of 1.60% on Monday while the Sensex gained only 0.70%, showing a big gap in closing levels. This divergence was much more than the normal 5-10% difference previously. On Tuesday, the difference narrowed — while NSE Nifty closed with a loss of 0.64%, the BSE Sensex showed a loss of 0.27%. Why benchmarks diverged, CAS sparks closing volatility Reliance Industries Ltd (RIL) shares closed lower by 1.22% on the BSE whereas it showed a loss of 2.13% on the NSE on Tuesday. ICICI Bank closed with a loss of 0.37% on the NSE while it was marginally up by 0.06% on the BSE. Infosys was down by 0.43% on the BSE but lower by 1.06% on the NSE. The Sensex comprises 30 stocks, while the Nifty includes 50. The additional 20 stocks in the Nifty can have a meaningful impact on the index, particularly when they witness sharp price movements during the closing auction, an analyst said. Even among the stocks common to both indices, weightages differ. Heavyweights such as Reliance Industries, HDFC Bank and ICICI Bank carry different weights in the Sensex and the Nifty. As a result, sharp gains in a few heavily weighted Sensex constituents can keep the index in positive territory even as the broader Nifty declines. The difference is expected to narrow further in the coming days. “Both the exchanges have separate order books for CAS similar to the continuous trading session and hence, the prices of the individual stocks are also different. As the index is calculated based on the prices determined of the individual stocks, the index values can also be different,” NSE said in an official note.Story continues below this ad Market experts cautioned investors as CAS has led to volatility during the session. “The unusual price action around the closing auction continues to warrant caution, as the impact of the new settlement mechanism appears to be introducing elevated volatility into the final minutes of trade,” said Hitesh Rathi, Technical Analyst, Angel One. On Tuesday, the market started on a firm note but prices largely drifted lower throughout the session, as the market appeared to adjust for the previous day’s closing-auction spike. However, a sharp surge once again emerged during the closing auction, resulting in the index recouping almost all of its intraday losses. Old closing price system The new CAS system fundamentally changes how the official closing prices of stocks with derivative contracts are determined. Until last week, the closing price — which serves as the benchmark for calculating the closing value of stock indices, valuing mutual fund portfolios, marking institutional holdings to market and settling derivatives contracts — was based on the volume-weighted average price (VWAP) of all trades executed during the final 30 minutes of the normal trading session.Story continues below this ad The Securities and Exchange Board of India formally directed stock exchanges to introduce the CAS s