Summary:
The Nifty 50 fell nearly 200 points on August 4 while the Sensex remained largely unchanged due to the introduction of the Closing Auction Session (CAS) for F&O stocks. The new closing price mechanism created temporary differences between NSE and BSE closing prices, leading to divergent index movements. NSE said such variations are expected during the transition and should stabilize as market participants adapt.
There was a unique kind of disparity in Indian benchmark indices that happened on August 4 when the Nifty 50 index closed at a level 200 points down from its previous close whereas the Sensex stayed almost the same. This kind of disparity was due to the fact that a new method called Closing Auction Session (CAS) was introduced from August 3 onwards.
This new method resulted in a substantial disparity between the closing prices of the individual stock on NSE and BSE.
New Closing Auction Session Creates Nifty-Sensex Divergence
The Nifty 50 index on August 3 ended at 24,774.30, which is a rise of 390.70 points or 1.6%. But before the auction process, the index closed at 24,589, which is an increase of 0.8% compared to the previous day's closing. In this case, there is a difference of around 200 points between the closing price of regular session and final closing price.
But the Sensex index did not show much effect by the auction process. The index closed at 78,677.13 in regular session and 78,639.03 in final closing, having very little difference.
On August 4, the Nifty corrected its huge rise of the previous day, but the Sensex index remained almost unchanged. The reason behind this situation was the different closing price of stocks for calculating the two indexes.
How the Closing Auction Session Works
Under the new CAS scheme, trading in eligible F&O stocks stops at 3:15 pm. Thereafter, an auction process takes place, where buy and sell orders are matched in a manner that helps decide a single closing price.
The auction process runs from 3:28 pm to 3:30 pm. The last cut-off time for collecting orders is selected randomly during this period to avoid any manipulation during the last minute of the auction.
The closing price is decided in a ±3% range of the reference price, which is set at the volume weighted average price (VWAP) from 3:00 pm to 3:15 pm.
The new system is a replacement of the previous system of closing price, which was based on VWAP.
Have a look at how CAS works and what are the new Timings.
Why Nifty Surged and Then Corrected After CAS Implementation
Nifty 50 is made up completely of stocks eligible for F&O, which means that all the stocks in the index shifted to the new auction method of closing. As the closing prices had been arrived at via a separate auction process, a number of stocks saw closing prices which differed from the rest, causing the index to jump on the first day.
This jump was attributed to an isolated effect due to the new system being introduced. Market analysts said that such price variations are normal when there is a new trading system and would be expected to diminish as participants get used to the system.
The new system could also make markets more volatile near market close.
NSE Clarifies on Index Movement and Participation
The NSE clarified that there had been no spike in the value of Nifty at 3:30 pm. In the CAS auction, there is no continuous matching of orders; the index shown will be on the basis of the trades made. The indicative values that were shown separately are based on continuously derived equilibrium prices during the auction period.
NSE further clarified that in both exchanges, there will be separate order books in the CAS session just like there are in the regular trading session. As such, the prices of individual stocks will differ in the two exchanges hence different index values.
During the first day of implementation, there were 515 trading members who traded with orders of 56,773 unique PANs. This was more than the number of orders in the pre-open call auction where 403 trading members participated with 42,822 unique PANs orders.
