Synopsis
This Monday marks a critical juncture for India’s new closing auction system, as it gears up to manage an influx of billions in passive fund trades. The quarterly MSCI index rebalancing is expected to catalyze heightened trading volume, putting the system’s reliability under scrutiny. Both market participants and regulators are keenly awaiting how smoothly it addresses large institutional orders in this high-stakes environment.
Bloomberg India’s contentious new closing auction system is about to face its biggest challenge yet as billions of dollars in passive-fund trades flow through it.
The quarterly rebalancing of MSCI Inc. indexes on Monday will be a key test of whether the mechanism can absorb large institutional orders without producing the sharp price swings that have unsettled traders since its launch earlier this month.
The index changes may spur about $5 billion in trading turnover by global passive funds, with roughly $4 billion passing through the Closing Auction Session, according to Brian Freitas, founder of Auckland-based Periscope Analytics.
“It could get pretty messy,” Freitas said. “The expected flow is almost 30 times what the CAS window has typically been handling.”
The scale of the event is significant compared with what the auction has handled so far. The mechanism has typically been seeing about $125 million of daily turnover.
Bloomberg The rebalance will put the Securities and Exchange Board of India’s most consequential market reform in recent years under fresh scrutiny after backlash from traders. The BSE Sensex gauge saw a “flash crash” during the 20-minute auction last Thursday, exacerbating concerns over thin liquidity and manipulation during the trading window.
Passive funds are required to track their benchmarks closely, meaning index changes can trigger large orders to buy stocks being added or increased in weight and sell those being cut or reduced. The trades are typically executed around the effective close to minimize tracking error, concentrating a large amount of demand and supply inside the auction.
MSCI said in an emailed statement it will monitor the “practical effectiveness” of the new closing auction, informed by feedback from market participants that include its clients and index users.
India’s market regulator has said that the auction is designed to reduce tracking error for passive funds and to align the stock market with global standards. Last week, Chairman Tuhin Kanta Pandey reiterated that the new mechanism will remain in place despite growing calls for changes.
Following its latest quarterly review, MSCI announced that Lenskart Solutions Ltd., Laurus Labs Ltd., Adani Energy Solutions Ltd. and Billionbrains Garage Ventures Ltd. will be added to its standard indexes, while Balkrishna Industries Ltd., SBI Cards & Payment Services
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