Mumbai, August 6: The Bombay Stock Exchange (BSE) is set for the weekly expiry of Sensex derivatives contracts on Thursday. With recent implementation of the new Closing Auction System (CAS) and low liquidity in the BSE cash market, heightened volatility is anticipated.
Following the Nifty expiry on Tuesday, market participants are exercising caution. During that session, the benchmark index surged by over 150 points in the closing auction, leading to significant movements in derivatives that surprised many traders.
Analysts express concerns regarding the Sensex, noting that participation in the cash market during the auction window is considerably lower compared to the National Stock Exchange (NSE). This raises the likelihood that major trades could significantly influence the final settlement price.
They emphasize that the success of this system relies heavily on broad market participation.
Market experts also report an improvement in auction volumes on the NSE in recent sessions, with the gap between Nifty spot and futures prices narrowing. However, participation in the Sensex closing auction remains relatively low.
In light of the uncertainty, implied volatility on Sensex call options has surged ahead of Thursday’s expiry, indicating that traders expect substantial price fluctuations by the end of the session.
Under the CAS, the stock exchange collects buy and sell orders during a designated auction window and determines a single equilibrium price that maximizes order matching. This system was introduced to enhance the accuracy of price discovery at market close.
However, some warn that low liquidity may make it easier to influence the settlement price, especially if there is significant buying or selling in heavyweight stocks during the auction.
According to experts, even minor price changes in major index stocks could greatly impact the Sensex’s closing level and, consequently, the options settlement.
Conversely, some analysts believe these concerns may be overstated. They suggest that instead of taking aggressive positions ahead of the first Sensex expiry under the new system, traders may reduce their exposure following the volatility observed during Tuesday’s Nifty expiry.
While concerns persist, experts believe that any resulting volatility from the closing auction system will be temporary, as market participation is expected to grow over time, improving the price determination process.
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