SEBI’s consultation paper on Introducing Close Auction Session in Equity Cash segment

Goal

Passive fund investing has grown loads in India and worldwide, with Indian shares changing into extra vital in world indices. Nonetheless, the Indian market doesn’t enable trades to be achieved on the precise closing worth, inflicting points for passive funds and their traders. To repair this, world funds have prompt introducing a Shut Public sale Session (CAS) to set correct closing costs, much like different main markets. This paper shares a proposed plan for CAS and asks for public opinions on how helpful and sensible it might be for India’s markets.

Present follow in Indian Markets

In India, the closing worth of shares is predicated on the Quantity Weighted Common Value (VWAP) from the final half-hour of buying and selling. Whereas this technique ensures a good worth, it doesn’t enable patrons and sellers to commerce on the precise closing worth.

Development in passive investing

With the expansion of home passive funds and Indian shares in world indices, worldwide fund homes spotlight that the present closing worth technique causes worth volatility and incomplete giant orders, growing monitoring variations, particularly on main occasion days like index rebalancing and spinoff expiries.

Evaluation of volatility of shares on Index rebalancing days

Key Points:

Volatility: The final 30-minute VWAP-based closing worth results in important worth volatility throughout shares.
Monitoring Variations: Passive funds face elevated monitoring variations, particularly on main occasion days (e.g., index rebalancing and spinoff expiry).
Order Completion: Excessive danger of enormous orders remaining unfulfilled throughout risky intervals.

Observations on Volatility:

NIFTY 50 Shares:

MSCI Rebalancing Day (Could 31, 2024): Volatility over the last half-hour was 1.8 occasions greater than throughout earlier buying and selling hours (09:15–14:30).
FTSE Rebalancing Day (June 21, 2024): Volatility was 1.5 occasions greater throughout the identical interval.

Indian Shares in MSCI World Commonplace Index:

Could 31, 2024: Final 30-minute volatility was 3.3 occasions greater than earlier hours.
August 31, 2024: Final 30-minute volatility was 2.9 occasions greater.

Indian Shares in MSCI World Small Cap Index:

Could 31, 2024: Final 30-minute volatility was 2 occasions greater than earlier hours.
August 31, 2024: Final 30-minute volatility was 2.3 occasions greater.

Evaluation of Monitoring Variations for Passive Funds on Occasion Days

Key Findings:

Home Passive Funds:

NIFTY 50 Index Fund:

Common monitoring distinction on rebalancing days (June 2023–July 2024): 0.76 foundation factors (bps).
Common monitoring distinction on different days: -0.12 bps.

NIFTY Midcap 150 Index Fund:

Common monitoring distinction on rebalancing days: -1.46 bps.
Common monitoring distinction on different days: -0.09 bps.

Worldwide Passive Fund (Monitoring MSCI, FTSE, and S&P Indices):

Common monitoring distinction for Indian shares on rebalancing days: -3.29 bps (July 2023–July 2024).
Common monitoring distinction on different days: -0.19 bps.
Notably, the fund skilled monitoring variations throughout all buying and selling days.

Worldwide benchmarking

Main markets worldwide, together with these within the Asia-Pacific area, use a closing public sale mechanism (CAS) to find out closing costs. An evaluation of index rebalancing days (Could 31, 2024, and August 31, 2024) confirmed that markets with CAS skilled no spikes in volatility for shares added or faraway from MSCI indices. In distinction, India, which lacks CAS, noticed important volatility over the last half-hour. Nonetheless, on non-rebalancing days, India’s volatility over the last half-hour was corresponding to earlier buying and selling hours, highlighting the precise affect of occasion days on the present system.

Evaluation of Liquidity Patterns in Jurisdictions with CAS:

A examine of Hong Kong and South Korea (Could–June 2024) reveals that the final half-hour of the Steady Buying and selling Session (CTS) earlier than CAS nonetheless appeal to steady buying and selling volumes, accounting for 9%–14% of each day turnover. On occasion days, corresponding to index rebalancing and spinoff expiry, CAS periods noticed a big surge in buying and selling exercise, indicating their means to centralize liquidity throughout vital intervals with out negatively impacting common buying and selling hours.

Buying and selling Patterns Throughout Index Rebalancing in India:

An evaluation of buying and selling over the last half-hour on MSCI India Index rebalancing days (February 29, 2024, and Could 31, 2024) reveals that International Portfolio Buyers (FPIs) dominated, contributing 56%–60% of gross traded worth in affected shares. Proprietary and retail traders accounted for 17% and 11%, respectively, whereas home mutual funds contributed 8%–9%. Introducing CAS in India may shift liquidity from CTS to CAS, as FPIs and mutual funds are prone to want buying and selling on the CAS-determined closing worth. Over time, CAS may stabilize liquidity and centralize buying and selling volumes on occasion days.

Evaluation of Reference Costs and Closing Costs round rebalancing days

An evaluation of reference costs (set by CTS) and shutting costs (decided by CAS) round MSCI index rebalancing days in Q2 2024 reveals important variations on the rebalancing day. Throughout varied jurisdictions, the common distinction between the reference worth and shutting worth ranged from 0.61% to 4.04%. Within the 7-day intervals earlier than and after rebalancing, the common distinction was smaller, starting from -0.2% to 0.5%. This highlights the position of CAS in capturing important worth changes throughout rebalancing, guaranteeing extra correct closing costs in comparison with CTS.

Abstract of Proposals for Introducing CAS

The Securities and Change Board of India (SEBI) proposes implementing a Shut Public sale Session (CAS) to find out the closing worth of shares within the fairness money phase. Key facets embrace:

Introduction of CAS:

CAS will substitute the present VWAP-based technique with a call-auction mechanism.
Initially utilized to shares with derivatives to make sure liquidity.

Timing:

A 15-minute session from 3:30 PM to three:45 PM.

Design Choices:

4-Stage Design:

Reference Value Calculation (1 minute).
Order Enter Interval (6 minutes).
No Cancellation Interval with Random Shut (4 minutes).
Commerce Affirmation and Matching (4 minutes).

Three-Stage Different:

Reference Value Calculation (1 minute).
Order Enter with Random Shut (10 minutes).
Commerce Affirmation and Matching (4 minutes).

Desk 5: 4-Stage CAS Design

Desk 6: Three-Stage Different Design

Value Limits:

Stage 1 (Order Enter): ±5% of Reference Value.
Stage 2 (No Cancellation/Random Shut): Restricted to highest bid and lowest ask on the finish of Order Enter.

Equilibrium Value:

Decided primarily based on most executable quantity.
In circumstances of ties, desire is given to the value closest to the Reference Value or the Reference Value itself.

Order Execution:

Restrict orders are prioritized over market orders, with execution following price-time precedence.

Integration with CTS:

Unexecuted CTS orders can carry over to CAS however are handled as restrict orders inside CAS worth limits.

Put up-Shut Session:

Discontinued, as CAS will fulfill the necessity for trades on the closing worth.

You may verify the total session paper from SEBI right here:

sebi.gov.in

SEBI | Session paper on Introducing Shut Public sale Session in Fairness Money…

Securities and Change Board of India is made for shield the pursuits of traders in securities and to advertise the event of, and to control the securities market and for issues related therewith or incidental thereto