India’s market regulator has accelerated discussions with high-frequency trading firms and other market players, people familiar with the matter said, on growing concerns over its new auction system to determine stock closing prices.
Officials at the Securities and Exchange Board of India had meetings with market makers, domestic mutual fund managers and stock brokers this week to collate feedback for any potential review of the mechanism launched Aug. 3, the people said, asking not to be identified as the discussions are private.
The regulator is open to tweaking the system and is gathering inputs from market players, SEBI Chairman Tuhin Kanta Pandey said at a public event Wednesday.
A SEBI representative did not immediately respond to a request for comments.
The new closing auction system was meant to improve price discovery and prevent market manipulation, but it’s led to confusion. Some high-frequency trading firms flagged they couldn’t borrow stocks for trading in India’s developing securities-lending market, limiting their participation in the auction, according to some of the people familiar. Meanwhile, some brokers suggested reverting to the previous mechanism on rebalancing days for passive funds until liquidity improves, one of the people said.
Brokers including those who execute trades for foreign funds were particularly concerned over the new auction system’s ability to handle trades later this month, when global passive funds rebalance their portfolios following MSCI Inc.’s quarterly changes, one of the people said.
The new price-setting method, covering more than 200 stocks with listed derivatives, was first proposed by SEBI in 2024 after index-tracking funds sought a closing auction to reduce tracking errors. It aligns India’s market structure with major global exchanges and replaces a previous system based on volume-weighted average prices in the last 30 minutes of trading.
Many proprietary trading firms and high-frequency traders, which provide liquidity in the last hours of the session, either stayed away from the auction or reduced activity in the initial days. The thin liquidity caused larger moves in the equilibrium price than what investors were used to before the system was rolled out.
The uncertainty triggered by the new auction is already having an impact on trading behavior. The average turnover in the auction window has shrunk 40% compared with that in the last 15 minutes of trading under the previous regime, according to a person who has seen the data.
Meanwhile, the average traded volume of index options declined 27% to 268 million contracts on the Aug. 4 and Aug. 11 settlement days, down from the average across weekly expiries in July, according to data compiled by Bloomberg.