Markets: Price discovery
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MicroStockHub
On the first day of the new closing auction, the indices closed well away from their 3:15 pm levels. Dealing rooms spent the evening guessing who traded and where. Since then, the market has watched the last fifteen minutes more closely than it has in years, and weekly options expiry sharpened that watch. The street calls the Closing Auction Session unsettled. It is, in fact, behaving exactly as an auction should, and the mechanisms surrounding it have yet to be built.An auction is not a price; it is a book. Orders arrive from both sides, the system finds the price at which the most trades happen, and that becomes the close. With both sides present, the price is a consensus and holds. With only one side, it travels until it meets the last willing counterparty.So this is plumbing, not design. The regulators have given the market a closing auction with a price band, a random close and a published equilibrium price. The safeguards are in place. What is missing is a way for a counterparty to show up.Order typesStart with order types. Today, only market and limit orders are available, and both want to be filled, so orders clustering on one side move the price with them. India needs an order type built to lean against the crowd. Nasdaq offers an Imbalance Only order, which trades only against the surplus already in the book. It cannot start or widen an imbalance; it can only absorb one. It carries a price, since a liquidity provider will buy the surplus, but not at any price. An Indian version could allow unpriced orders, with the indicative equilibrium price as the limit.Two rules make it work. Nasdaq accepts market-on-close orders until 3:55 pm; after that, only imbalance-absorbing orders, which cannot be cancelled, are accepted. Late liquidity does not spoil a good close; it is most of it. The New York Stock Exchange allows its Closing Discretionary Order to be amended until seconds before the bell, and by August 2024, that order accounted for over 46 per cent of its closing auction volume.Everyone must see the same thing. Nasdaq publishes the paired quantity, the imbalance, and the clearing price every 10 seconds from 10 minutes before the close. The New York exchange updates every second and, in 2024, took late orders into that feed. India now needs to settle the interval, the content, and simultaneous release to retail terminals and co-located servers. A trader can then act on a visible imbalance, not a guess.Should someone be obliged to stand there? In New York a designated market maker absorbs the residual with its own capital. India has a comparable provision, the Liquidity Enhancement Scheme in Chapter 2 of the Master Circular for Stock Exchanges and Clearing Corporations, which lets an exchange run a scheme on any security with its governing board’s approval. Present schemes pay for two-way quotes through the day, nothing for the auction. The obligation should cover that book alone, capped per stock per day within a band around the reference price.The constraintsThe deepest constraint is whether a seller can exist at all. A fill in the auction is cash today against delivery tomorrow. Anyone selling into a buy-heavy close must own the stock or have borrowed it. Arbitrage funds can offer the cash leg they already hold. Equity savings schemes can move their hedge ratio within a band. Each is bounded by what it owns. Only a Specialised Investment Fund may sell what it does not own, and even then it must borrow.The borrow is the work that remains. Lending is possible for 176 of nearly 2,600 listed companies because eligibility depends on derivatives exposure. So stock is lendable where a derivative substitute exists, not where the borrow matters most. Collateral is 100 per cent for every company, besides lending fees, Value at Risk and Extreme Loss margins. Contracts run on a fixed monthly calendar. Recall is a request, not a right. Custodians cannot lend under a standing mandate, and foreign investors, the largest holders of idle Indian stock, must only come order by order.That asymmetry explains the rest. The buy side of an imbalance needs cash, which anyone can arrange. The sell side needs stock, which most participants cannot get today. Solving one side alone will keep producing one-sided closes.The auction was the right choice. It now needs an order type that safely absorbs an imbalance, real-time data that shows it to everyone at once, a liquidity scheme written for an auction, not a trading day, and a lending market deep enough to carry the seller.These are four additions, not a reopening, and the plumbing the auction needs as it extends to more stocks.Shunmugam is Partner; Ugale is Associate Consultant, MCQube, MumbaiPublished on August 13, 2026
