Nifty’s Volatile Closing Auction Punishes Retail Traders Amid Thin Liquidity

The Nifty 50 witnessed a tumultuous closing auction session, punishing both long and short retail options traders as thin liquidity exacerbated rapid price swings and unexpected market reversals.

Illustration: Dominic Xavier/Rediff

Selling in private-sector banks dragged the Nifty 50 down 0.61 per cent on Tuesday, while what was expected to be a routine closing day in the options market turned into losses for retail options traders.

The Sensex ended at 75,577.58, down 555 points, or 0.73 per cent.

The Nifty’s intraday high of 23,758.95 was below the previous close of 23,779.15.

The index finished 12 points off its low and is now 10.4 per cent below its 52-week high of 26,373.2.

The benchmark was at about 23,640 when the closing auction session (CAS) opened at 3.15 pm.

Over the next half-hour, the indicative equilibrium price — the provisional level at which the auction would settle, published while orders are still being matched — fell as low as 23,377, about 1.7 per cent lower.

Market Volatility and Trader Losses

Options traders considered 23,600 a major support level. But in the final 15 minutes, that support was broken and even defended through the indicative price mechanism.

When the market fell to 23,300, many traders went short, expecting a further decline.

The market, however, immediately moved back towards 23,600, trapping the shorts.

“Traders positioned on both sides got punished,” an options trader said.

India Vix, the market’s volatility gauge, closed at 11.23, up 0.65 per cent — barely moving on a day when put premiums were going through the roof.

The option price for the 23,650 put rose from Rs 11 to Rs 95 within minutes.

This kind of volatility hurts retail options traders the most, as they feel that large investors and algorithmic traders with greater capital can make huge profits because they are faster and can deploy derivatives strategies more effectively.

Addressing Liquidity Concerns

“CAS is not the problem.

“The fact is that there is not much liquidity in the Indian market.

“On the day of the Morgan Stanley Capital International rejig, we did not face any problems because liquidity was not a constraint on that day.

“The regulator should talk to the traders and institutions and figure out a way to solve this problem,” said Shai Coelho, a derivatives strategist.

He further said that the derivatives market is not designed for retail investors, who often make losses against sophisticated institutions.

Traders also feel that the 3 per cent range for buy and sell orders during the CAS, used for reference price calculations, should be changed or narrowed to 1 per cent, as the current range is too wide for a 15-minute window in which to place orders.

Improving Closing Mechanisms

“We feel that CAS can be improved.

“Markets like the New York Stock Exchange and London already use similar closing mechanisms. But Indian cash markets don’t yet have the same depth and participation in that closing window.

“We’re seeing moments where spot, futures and options (F&O) aren’t moving in sync the way they used to, which suggests the market is still adjusting to the new rhythm.

“A clean, well-participated CAS close can help restore that alignment, but it needs stronger volumes in the last 15 minutes,” said Gaurav Arora, head of research at Sahi, a trading platform for F&O.

The Nifty Private Bank index fell 0.98 per cent, against a 0.15 per cent dip in public-sector banks, while Nifty Financial Services was the weakest core sector of the day, at 0.93 per cent.

ICICI Bank was the single biggest drag, down 1.97 per cent and Rs 20,158 crore lighter.

State Bank of India (SBI) held on to a 0.21 per cent gain.

SBI Life fell 2.04 per cent, while New India Assurance Company dropped 11.24 per cent, the steepest fall among the 500 largest listed companies.