With Securities and Exchange Board of India (Sebi) Chairman Tuhin Kanta Pandey clarifying that the closing auction session (CAS) is here to stay with tweaks, many market players are looking forward to rationalisation of rules across various parameters.
While brokerages are batting for a narrower than the +/-3% range within which market participants can place orders, mutual fund managers are following a wait-and-watch policy. The latter also believe that more time is required for the system to settle down and eventually take off.
Chandan Taparia, head of derivatives & technicals at Motilal Oswal Financial Services, said there is currently little incentive for retail investors to place orders during CAS because of sharp price spikes and uncertainty over order execution. He suggested that narrowing the 3% band could reduce volatility in index values during CAS.
Taparia also suggested that the reference price be calculated and displayed live to provide greater transparency before participants enter the closing auction. He said increased participation by arbitrageurs could also help reduce divergence between indices during CAS.
A senior official at a brokerage house suggested replacing the uniform order range with stock-specific bands based on the historical performance and volatility of individual stocks.
“As the weightage of stocks in the indices is not the same, we cannot have the same range for placing orders during CAS. Currently, large orders placed within this range in stocks with the highest weightage are leading to spikes in the indices during the last 15 minutes,” the official said.
He added that introducing stock-specific ranges could help boost liquidity during CAS.
Venkatachalam Shanmugam, former head of research and administration at MCX, said that while CAS has buy-side participation from passive funds, there is not a sufficiently large sell side to provide liquidity. He suggested that the regulator focus on encouraging sell-side participation from foreign portfolio investors (FPIs), domestic mutual funds and specialised investment funds (SIFs).
According to Shanmugam, trading costs and low liquidity are among the biggest impediments to FPI participation. To address these issues, he suggested allowing bulk orders across portfolios under the stock lending and borrowing mechanism (SLBM), instead of requiring separate orders for each portfolio, to facilitate short selling.
He also recommended reducing risk-management charges and significantly expanding the universe of stocks available under SLBM to improve liquidity during CAS. In addition, he suggested allowing participants to file orders during CAS as a safeguard against manipulation.
On Monday, Pandey said that the market regulator is looking at all the suggestions. “I have myself seen a number of suggestions which have come from social media. Our teams have gone through them and they are discussing them with the participants,” he added.