Market participants may need to give the Closing Auction System more time to settle, but the sharp swings seen around expiry have raised questions over liquidity and price discovery. Manjiri Mazumdar, head of dealing at Emkay Global, said the system could work well over the long term, though it is currently facing initial teething issues.
Speaking on NDTV Profit, Mazumdar said the indicative price during the closing auction should not be treated as a reliable benchmark for trading options. Unlike the final matched price, the indicative price can change sharply as orders are entered and withdrawn.
“The way you look at indicative prices, it will always be a little faulty because you can always withdraw the order also,” Mazumdar said.
Indicative Prices Can Trigger More Volatility
The issue becomes particularly important on expiry days, when derivatives activity, hedging and unwinding can amplify short-term price moves. Mazumdar said traders acting on the indicative price can face large swings, while stop-loss orders can further accelerate the move.
She pointed to the risk faced by option writers, saying the closing level can become difficult to anticipate under the current setup.
“For a writer's perspective, as I said, it's a black box. It's very tough to anticipate where the closing will come,” she said.
This uncertainty can make writing options less attractive, particularly when a relatively thin cash market can influence the closing price.
Emkay Global Sees Scope To Rework Option Pricing
Mazumdar suggested that the pricing mechanism for options could be reviewed, particularly for weekly contracts. One possibility, she said, would be to use a more actively traded reference price for settling weekly or monthly options.
The aim would be to use a price that has greater liquidity and participation from arbitrageurs and other liquidity providers.
“Can we actually move to the reference price, which is a more traded price,” she said, adding that this could potentially provide a fairer price for derivatives settlement.
Mazumdar also noted that several stocks had moved 2% to 3% on very low volumes during the closing auction, with those levels eventually becoming important for monthly closing prices.
She said the Closing Auction System itself could continue to work effectively as market participation and liquidity deepen, but the current transition period warrants caution among traders, especially on expiry days.
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