Market barometers, the Sensex and the Nifty 50, continued to exhibit divergent movements for the third consecutive session on Wednesday, 5 August. The Sensex jumped over 600 points, or nearly 1%, during the session, while the Nifty 50 declined by 0.20%.
In the previous session, the Nifty 50 dropped 0.64%, while the Sensex declined 0.27%. On Monday, the 30-share pack rose by 0.70%, while the NSE counterpart surged 1.60%.
The divergence in the benchmarks can be attributed to the implementation of the Closing Auction Session (CAS) in the equity cash segment, which became operational on Monday.
As per a new auction-based mechanism, designed by the market regulator Securities and Exchange Board of India (SEBI), the Closing Auction Session will be conducted every trading day from 3:15 PM to 3:35 PM, immediately after the regular market closes at 3:15 PM. During this 20-minute window, investors can place market and limit orders to help determine the official closing price of eligible stocks.
The order entry window will close at a random time between 3:28 PM and 3:30 PM, with the exact time determined automatically by the exchange’s system. This random closure is intended to prevent last-minute manipulation of stock prices.
While the cash market’s closing auction ends at 3:35 PM, trading in the equity derivatives segment continues until 3:40 PM.
“The significant gap between the 3:30 p.m. and 3:40 p.m. closing prices of Nifty stocks and the index, along with the divergence with Sensex, suggests that the new system is not functioning as intended, resulting in heightened price volatility. This has triggered forced square-offs of positions, particularly among retail investors, ahead of the 15-minute blind derivatives window closing session,” Vinod Nair, Head of Research, Geojit Investments, noted.
These appear to be initial teething issues in the new system, and the exchanges and market regulator need to address the discrepancies. Currently, the impact is limited to the F&O segment of trading stocks and main indices. These are not fundamental structural concerns and are likely to be brought under control. The broader economic and financial outlook remains solid and does not alter the view of long-term investors. The current volatility is expected to reverse as the exchanges return to their normal operating structure,” said Nair.
Meanwhile, the RBI on Wednesday announced a status quo on benchmark interest rates and maintained a ‘neutral’ policy stance, in line with market expectations. The Sensex remained in the green with modest gains after the monetary policy announcement.
When will the Nifty 50 normalise?
Due to the change in the closing mechanism, the Nifty spot is exhibiting contrasting moves relative to the Sensex. Experts believe the trend will start to normalise as participation in CAS increases. Once ample liquidity is in place in that segment, the difference between the Sensex and the Nifty 50 will subside.
“We are once again seeing a divergence between Nifty and Sensex spot performance due to a last-second uptick in Nifty following CAS implementation. Yesterday, Nifty spot witnessed nearly a 150-point uptick at the close, whereas Sensex ended near its last traded price. This divergence is simply the normalisation of the previous day’s last tick. These closing price anomalies should begin to normalise as participation in the CAS increases,” said Vipin Kumar, AVP-Research at Globe Capital Market.
Shashank Udupa, a SEBI-registered research analyst and the founder of Vayu Capital, highlighted that this is a liquidity gap showing up as an index gap.
“On day two, closing-auction turnover was about ₹1,542 crore on the NSE against roughly ₹9 crore on the BSE. When the same F&O stock gets a deep auction book on one exchange and an almost empty one on the other, the two closes drift apart, and Sensex and Nifty end up printing different numbers. The Nifty was at 24,463 just before Tuesday’s auction and finished about 0.6% higher,” said Udupa.
“Normalisation will follow participation. Once institutions and index funds start routing close-of-day flow into the auction, the gap should compress over the next few weeks. SEBI holding the framework steady through the rollout is the right call. The market regulator has also said auction volatility will decline as participation increases,” said Udupa.
(This is a developing story. Please check back for fresh updates.)
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
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