The weekly Sensex contracts expiry on Thursday will be the first major test of India's new Closing Auction System (CAS) under live market conditions. Traders are entering the session with more caution rather than conviction, as concerns mount over the low participation in Sensex's cash markets, especially during the auction window. According to Zee News, this has raised fears that the final settlement price might be easier to influence, when crores of derivatives settle against a relatively thinly traded cash market. Sensex call option implied volatility (IV) has risen sharply ahead of expiry, indicating that traders are assigning more uncertainty and higher probability to another late-session move. Chandan Taparia, Head of Technical and Derivatives Research at Motilal Oswal, warned that "if people bid aggressively tomorrow, especially because it's the weekly expiry, we could see a spike." The effectiveness of the system depends on broad market participation, with concerns more pronounced for Sensex due to significantly lower participation during the auction window compared to NSE.
The BSE Sensex's first weekly expiry since CAS implementation saw spurts similar to Nifty's moves over the past three days, though with milder magnitude. As reported by The Economic Times, Sensex ended at the day's high of 78,954.76, up 0.48% over Wednesday, while Nifty closed almost flat despite being up as much as 0.2% earlier in the day. Samir Doshi, CEO of Marwadi Shares and Finance, noted that "once again on Sensex expiry, we saw virtually no decay in options premiums. Sensex options witnessed an unusual spike in implied volatility to 41-42% during the day, higher than the levels seen during the Jane Street episode, which is an extremely rare occurrence, especially in the absence of any market moving news." Cash market volumes in the final half hour were just around ₹120 crore, well below the typical ₹400-500 crore, indicating continued low liquidity conditions. Chandan Taparia from Motilal Oswal observed that "the key anomaly continues to be the absence of theta decay in options premiums," suggesting this could become the new normal given heightened uncertainty around CAS sessions.
Significant trading activity in ICICI Bank hinted at efforts to sway the index's trajectory during Thursday's session, according to The Economic Times. The 79,000 call premium surged from around ₹100 to ₹330 before collapsing to zero in the final half hour, demonstrating the volatile nature of current market conditions. This activity occurred even after the CAS session began, with options premiums remaining elevated throughout the day. Market participants had earlier expressed concerns about Sensex's expiry given the spurt seen in Nifty, believing it would be even easier to move the index given its low trading volumes. The concentration of trading activity in specific stocks during critical periods raises questions about market manipulation potential under the current CAS framework.
The new closing auction process, limited to the 200-odd stocks in the F&O segment, lasts about 20 minutes from 3:15 pm to around 3:35 pm, where the exchange first collects buy and sell orders and then matches them to determine a single official closing price. As reported by The Financial Express, NSE accounted for nearly 100% of the auction volume by day's end, but the number of UCCs (unique client code) traded during the CAS fell on Tuesday, suggesting fewer participants had a larger influence on the Nifty's close. Cash market volumes dropped to only about ₹1,500 crore in the last 30 minutes, compared to the usual ₹6,000-7,000 crore, with open interest also declining significantly. This concentration makes it easier for large orders to move the market, while the shift from volume-weighted average price (VWAP) to the new mechanism has made closing prices more sensitive to large orders. The regulator says the change is aimed at improving price discovery, increasing transparency and concentrating end-of-day liquidity, with orders during the auction accepted within a 3% price band around the reference price. Some participants warned that low liquidity could make the settlement price easier to influence if a few heavyweight stocks witness aggressive buying or selling during the auction, with even relatively small price moves in index heavyweights having a disproportionate impact on the Sensex closing level.
Gaurav Arora, head of research at SAHI, expects volatility due to the closing auction to reduce over time as market participants adjust to the newly introduced closing price mechanism. He believes that "as familiarity with the new mechanism grows and execution strategies evolve, the magnitude of spikes during CAS is likely to reduce," and improved participation and liquidity during the auction could also reduce such sharp changes. A senior official from a leading brokerage noted that while traders new to the pricing mechanism suffered losses in the first two days, some market participants who adjusted their option positions gained amidst volatility. He added that CAS is a standard practice in global markets and helps institutional investors execute bulk orders and avoid market volatility. Anand James from Geojit Investments expects the disparity due to CAS could persist in upcoming trading sessions as market participants are still uncertain about the final closing price once continuous trading stops. An immediate consequence of volatility due to CAS could be a decline in options trading volumes, particularly on expiry days as the uncertainty around the final closing price makes it more difficult for traders to accurately manage expiry-day positions. Despite near-term concerns, analysts broadly expect any volatility arising from the Closing Auction System to be temporary as market participation improves and price discovery becomes more efficient over time. Resolving the current volatility issues will require broader participation and coordination from mutual funds, market makers, brokers and investors, according to market experts.
BSE Sensex closed 152 points higher than its previous close, with the banking sectoral index remaining flat, increasing by just 0.02%, as the RBI MPC meeting ended with no change in rates, in line with market expectations. As reported by The Financial Express, market participants are shifting their focus to the closing auction on BSE during Thursday's trading session, especially as it will also see the weekly expiry of derivative contracts. Arora expects some volatility but does not see a sharp spike in BSE during the auction, while noting that BSE's auction mechanism has been relatively smoother than NSE. However, a source close to a brokerage association expects a sharp spike in BSE Sensex during Thursday's trading session due to weekly expiry of derivative contracts. SEBI has no plans to review or modify the framework, instead asking brokers to increase awareness and participation among retail investors. BSE has issued an advisory for investors and traders to familiarise themselves with the CAS, emphasizing the importance of understanding the new mechanism ahead of the critical weekly expiry test.
