Mumbai: India’s two benchmark stock indices usually move in tandem. On Monday, they didn’t. While the NSE Nifty surged 1.6%, the BSE Sensex gained just 0.7%. It was a rare divergence, but not a glitch.
The unusual trend followed the first day of the closing auction session (CAS) for futures and options (F&O) stocks, a new Sebi-mandated mechanism for determining closing prices that replaced the long-standing volume-weighted average price (VWAP) system.
The auction triggered a nearly 200-point surge in the Nifty in the final two minutes of order closing, leaving traders puzzled by the gap not only between the Nifty and the Sensex, but also between Nifty index’s underlying stocks and their futures.
The pricing discrepancy was because of the absence of participants, like arbitrageurs, who seize such gaps between the same stock traded on two exchanges.
This is borne by Reliance Industries on NSE closing up by ₹10 at ₹1,319 a share against a ₹1,309 closing per share on the BSE. Similarly, Reliance’s active futures contract on NSE ended ₹5 lower at ₹1,314.
The low participation was further underscored by total auction value coming in at ₹1,276.2 crore on the NSE versus just ₹10.8 crore on BSE.
Market participants and the regulator were mixed in their reactions.
“It shows there were just not enough traders to seize the price differences on the first day of the auction,” said a broking official. “We hope this doesn’t continue in future sessions, else the mechanism supposed to result in more robust price discovery will end up doing the opposite.”
“The first day (of the closing auction) is a disaster, clearly reflective of an imbalance in demand and supply in the absence of a vibrant stock lending and borrowing mechanism,” said Rajesh Baheti, director at Crosseas Capital.
A regulatory officer, who requested anonymity, said the divergence did not appear to be a systemic issue, but rather one of awareness asymmetry.
“Closing auction is a new product and many people are unaware of how it works. Though the exact reason for the move in Nifty will be determined by NSE, such price movements should settle down in a day or two as awareness and participation goes up,” this person said.
Queries to Sebi and the NSE remained unanswered till press time.
How things panned out
On Monday, the 200-point surge in Nifty happened between 3:28 and 3:30 pm. The move coincided with the random order-closing window during the 20-minute auction from 3:15-3:35 pm, driving up the benchmark 1.6% to 24,774.3, while the Sensex rose 0.7% to 78,639.03. Even the Nifty futures rose only 0.87% to 24,664.9.
Unlike the earlier system, which calculates the closing price of a stock using the VWAP of trades over the last 30 minutes of a session, a closing auction framework determines a stock’s closing price through demand and supply around a reference or volume weighted average price arrived at between 3 pm and 3:15 pm when continuous trading ends.
From 3:15-3:20 pm no orders can be placed as a transition happens from continuous trading to auction. Orders can be placed in a +/- 3% band around the reference price during 3:20-3:30 pm, with the exchange closing the order window randomly between 3:28 pm and 3:30 pm.
All these orders are then matched by the exchange algorithm to determine the closing price, which is the one where most buy-sell trades are executable, released at 3:35 pm.
To be sure, the Nifty has 93.1% share of the cash market with BSE holding the rest and so auction interest is likely to be greater on the former.
Divergent views, too
Baheti said the impact might have hit clients harder were it an expiry day of weekly Nifty options (which incidentally falls on Tuesday), as these options derive their prices from the underlying Nifty index, which surged unexpectedly during the auction.
“Just imagine what could have happened on expiry day, where deep out-of-the-money options (OTM) become in-the-money (ITM) ones and vice versa,” he said. “After today’s swing, I would expect many traders to square off their options ahead of CAS tomorrow (Tuesday) so as to not be caught on the wrong foot.”
OTM call options in this context refer to options that trade above spot prices. ITM refers to options that trade below the spot and, therefore, have intrinsic value.
Other market participants attributed the outsized moves to orders being placed by large institutions during the auction.
“There is a possibility that institutional funds could have deployed incremental SIP money at closing (Monday), leading to more orders in a few index-based heavyweights on NSE, which has the lion’s share of the cash market,” said an official from a top brokerage in the context of the spike.
Indeed, heavyweights like ICICI Bank, HDFC Bank, Reliance Industries, Infosys and Bharti Airtel were among the top stocks traded at the auction worth a combined auction value of ₹244 crore, which was almost a fifth of the total auction value of ₹1,276.2 crore. Together, these stocks have a weighting of 36.33% on Nifty as of 31 July.
Another official said it is also likely that traders closed their intra-day positions during the initial few moments of the CAS unknowingly at 3:15 pm as they would usually offload such positions at that time.
BSE provisional data shows domestic institutional investors (DIIs) net purchased ₹1,571.18 crore while foreign portfolio investors (FPIs) net purchased ₹922.26 crore of shares on Monday. In addition, NSE data shows that FPIs closed out ₹3,618 crore worth of net index futures short positions, which drove the rally.
The data suggests much of the buying was concentrated around the auction session.
Most of the people Mint spoke requested anonymity as the CAS was a regulatory mandate that took effect after intense consultations between the Securities and Exchange Board of India (Sebi) and market stakeholders, including exchanges and brokers, for a more robust price discovery mechanism.
The background
After two consultation papers in December 2024 and August 2025, Sebi fixed 3 August 2026 as the day for exchanges to implement the CAS.
Until today, closing prices were based on the average prices and volume of stocks (volume weighted average price) traded in the last half hour.
From Monday, the continuous trading session for 208 F&O stocks transitioned to a 20-minute closing auction session at 3:15, which runs through 3:35 pm.
While continuous cash trading ends at 3:15 pm, derivatives trading has been extended by 10 minutes to 3:40 pm under the new mechanism as the closing spot prices of auction are used in settling the futures and options contracts.
