On Monday, the Nifty closed 200 points higher than expected during the new Closing Auction Session (CAS). The jump happened despite thin participation, with several heavyweight constituents settling well above their 3:15 pm prices.
Brokers attribute the move to limited institutional depth on the first day of the auction. The NSE said the mechanism worked as designed, but the divergence raises doubts.
Today’s weekly derivatives expiry will test whether the new closing mechanism can handle real market conditions. The official closing price now determines actual financial settlements for cash‑settled index derivatives.
If auction prices deviate from fair value, futures and options may settle at distorted levels, creating permanent gains for some and losses for others. Delivery‑settled stock options could also be affected, turning out‑of‑the‑money contracts into the money or vice versa.
Uttam Bagri, MD of BCB Brokerage, warned that a distorted price on expiry day becomes permanent. He wrote, "If the same distorted price becomes the final settlement price for an expiring derivative, the gain or loss becomes permanent. Cash is credited and debited. Positions disappear. The contract is closed. Even if the market opens the next morning exactly where it should have been all along, the damage has already been done. The settlement has happened. It cannot be reversed simply because the market later corrected itself."
Brokers also fear regulatory consequences. Genuine trades executed during an illiquid closing auction could attract surveillance alerts or regulatory scrutiny. They argue that bona fide trades should not become suspect merely because they occurred during an anomalous auction.
Rajesh Baheti, Managing Director of Crossseas Capital, said the risks increase on expiry days. "We have option expiry twice a week based on the 'official closing', which, if it can be moved without traded volumes, is a disaster waiting to unfold," he said.
The uncertainty surrounding the new auction mechanism is already changing trading behaviour. Many traders are squaring off both cash and derivatives positions before the auction to avoid exposure to unpredictable closing prices.
If investors, institutions, hedgers and liquidity providers increasingly avoid the closing auction, liquidity could become thinner, making prices more susceptible to distortion. This could discourage further participation, creating a self‑reinforcing cycle of weaker liquidity and poorer price discovery.
Some brokers warn that such an environment may attract traders looking to exploit temporary pricing inefficiencies rather than investors executing genuine end‑of‑day transactions.
For brokers and traders, today’s expiry will be watched less for market direction and more for whether the new closing auction delivers an orderly settlement or raises fresh questions about the integrity of India’s price‑discovery mechanism.