New F&O closing auction rules: Impact on traders, investors decoded
Mumbai: From August 3, exchanges are overhauling the way closing prices are determined for stocks in the futures and options (F&O) segment. Here is what
Mumbai: From August 3, exchanges are overhauling the way closing prices are determined for stocks in the futures and options (F&O) segment. Here is what are the changes and what it means for traders and investors:What are exchanges changing?Exchanges are changing the way the official closing prices of certain stocks are decided. The daily closing price is one of the most important numbers for market participants. It is used to calculate index closing levels, mutual fund portfolios, and settle derivatives contracts.At present, a stock's closing price is based on the average price of trades done in the last 30 minutes, between 3 PM and 3:30 PM.From August 3, stocks that are available in the futures and options segment will have a separate closing auction. Their final closing price will be decided through this auction, instead of using the average price over last 30 minutes.132815941How will the new closing auction work?For stocks part of the F&O segment, normal trading will end at 3:15, after which the closing auction will begin.
During this session, buy and sell orders are collected instead of being executed immediately. The exchanges will then calculate a single price at which the maximum number of buy and sell orders can be matched. That price becomes the stock's official closing price.To prevent sharp price swings, the auction price can generally move only within 3% above or below the stock's average traded price between 3 and 3:15.Read more: RBI likely to extend rate pause; neutral stance seen unchangedInvestors can place both market and limit orders until 3:25. After that, only fresh limit orders are accepted, while market orders already entered cannot be changed or cancelled. These restrictions are meant to discourage last-minute changes or large market orders that could influence the closing price. Also, the auction will close at a random time between 3:28 and 3:30, making it harder for traders to time their orders at the last second.What's the big deal about last-minute order changes? Why should it matter?One reason for the change is that there have been complaints about large orders being placed at the close of trading in a bid to influence the final price.
Think of it as the final over of a cricket match. A few big shots in the last moments can alter the final score. Similarly, a few large trades just before the market closes can influence the closing price.A closing auction helps find one common price at which the maximum quantity can be traded. This is expected to make the closing price more reliable and reduce the impact of sudden orders placed near the end of the session.Another key reason for the change is to help mutual funds, especially passive funds, execute all their buy and sell orders in the closing auction. This will help them transact at or very close to the official closing price. Currently, asset managers place orders between 3 PM and 3:30 PM at different prices depending on available liquidity, which can lead to tracking errors. Brokerage Zerodha said the new rule helps improve the efficiency of the execution of large orders.Then, what's the relevance of the period between 3:30 and 3:40?By around 3:35, the closing auction for stocks that have F&O contracts will be over.
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