The introduction of a new closed auction mechanism for determining stock prices in the Futures and Options (F&O) segment led to an unusually large gap between the Sensex and Nifty indicators on Monday. Market participants attribute this to the dynamics of the auction and the level of liquidity.
On Monday, the session concluded with the Sensex and Nifty benchmarks showing a difference of 0.9 percentage points (90 basis points). The Sensex closed at 78,639, demonstrating a rise of 544 points or 0.7 percent. Meanwhile, Nifty finished trading at 24,774, increasing by 391 points or 1.6 percent. At 3:15 PM, Nifty was trading at 24,573.35, but ultimately closed 0.82 percentage points higher.
The sharp divergence in the closing levels of both indices caused confusion among market participants. Prakarsh Ghadani, founder of Soaring Peaks Capital, suggested that the cause of this discrepancy was the new closed auction mechanism, not manipulation. He noted that under the revised system, orders could be placed within a 3% price range, and on the first day, some participants might have submitted buy orders at a price higher than the current market price in Nifty stocks with significant weight. Even a 1–1.5% increase in the auction price for major index constituents can significantly raise the Nifty closing level.
Ghadani also added that Nifty experienced a sharper jump because the NSE has significantly greater liquidity in the money market and attracts a larger share of orders from institutional and mutual funds. He explained that concentrated activity in the auction for high-weight NSE stocks had a much greater impact on Nifty than comparable operations on Sensex. Previously, when the closing price was based on the weighted average over the last 30 minutes, both indices usually moved in sync; the new auction-based process created the possibility of temporary misalignment, especially on the first day.
Typically, the two benchmarks—Nifty and Sensex—move in alignment, and any divergence is usually minor. Since January 2000, there have been 75 instances where the difference between BSE Sensex and Nifty 50 exceeded 91.5 basis points in a single day. The last time both indices showed such a sharp divergence was on March 26, 2020, making Monday's close the second largest divergence between the closing levels of both indices since 2010. The largest divergence was recorded on April 25, 2000, when the difference reached 257 basis points.
A senior official from a brokerage firm, who wished to remain anonymous, linked the sharp jump in Nifty during the closed auction to a significant mismatch between buy and sell orders, which could have been triggered by fund flows related to SIP mutual funds. This official noted that since it was the first session under the new closed auction mechanism, many arbitrageurs and liquidity providers might have refrained from participating while assessing the system's performance. This could have led to a significantly higher number of purchases than available shares for sale.
A CIO of a mid-sized fund called the sharp fluctuations in Nifty during the closed auction an unexpected event, although initial teething problems were not entirely unforeseen given such a major change in operational processes. He predicts that stock prices will return to normal when the market opens on Tuesday. He stated that if today's closing price does not reflect fair value, the market will correct itself upon resuming trading the next day. Discovering a new opening price will help narrow the gap, and the divergence is likely to be corrected during trading.
This CIO also mentioned that the immediate implications for mutual funds relate to the calculation of Net Asset Value (NAV). He explained that funds are obligated to calculate NAV using the prescribed valuation methodology and cannot unilaterally determine the fair closing price. The valuation process is automated and generally relies on the closing price of the exchange with the highest trading volume, which is usually the NSE.
Another CIO noted that the consequences would have been more significant if this had occurred on an expiry day. He emphasized that if it happened on an expiry day, it could lead to substantial gains for some participants and equally large losses for others, as settlement values would be affected. Introducing the mechanism on a non-expiry day limited immediate negative consequences. Nifty derivative contracts expire every Tuesday.
NSE did not respond to inquiries regarding the sharp jump in Nifty on Monday. The closed auction session is a new method of determining stock prices, initially introduced for stocks in the F&O segment. If a stock is not in the F&O segment, this pricing mechanism does not apply. Instead of calculating the closing price based on the Volume Weighted Average Price (VWAP) over the last 30 minutes of trading, exchanges now collect buy and sell orders after the regular trading session ends and match them at a single equilibrium price where the maximum number of shares can be traded. This price becomes the official closing price. This mechanism is expected to make closing prices more reflective of actual supply and demand, improve the price discovery process, and limit the impact of large last-minute trades.
