India’s new closing-auction system was meant to improve end-of-day prices. In the options market, however, the mechanism is producing extreme swings that are creating and wiping out gains in minutes.
The first monthly expiry at the BSE Ltd. under the new system on Thursday showed how wild the swings can get. A 64,000-rupee put option tied to a bank index was trading at just 1.70 rupees (1.78 US cents) at the start of the auction. Within minutes, it shot up to 68.55 rupees — a jump of nearly 4,000% — before crashing back to zero. The entire move took 15 minutes.
“This is effectively compressing an entire trading session’s worth of risk into a few minutes,” said Maurya Ghelani, a derivatives strategist at Kai Securities in Mumbai. “If you are positioned on the wrong side, there may be almost no time to react.”
