A proposal by the Securities and Exchange Board of India (Sebi) to introduce a post-close call auction could help reduce instances of price manipulation towards the end of the trading day.
The agenda for Sebi's board meeting on March 8 mentions the introduction of a "post-close call auction".
Stock exchanges already have a pre-opening call auction mechanism for discovering the opening price. Through this, orders are collected and allowed to be modified. Later, these are matched for price discovery. As orders can be modified in the first leg, this allows for better price discovery and reduces volatility, experts say.
Now, this system would be used to determine closing prices, too. Currently, the last half-an-hour weighted average closing price is used to determine the closing price of a stock.
The risk management officer at one of the top five domestic brokerages said, "In the past, we have seen no trading volumes through the day. Suddenly, there is a spike in the volume, as well as the price. The current system leaves the closing price open to manipulation, especially in illiquid counters."
An exchange official agreed. "There have been instances of price manipulation, even in the last few minutes of trade, close to expiry. If there is a call-auction, such practices would be curbed," he said.
Recently, Sebi had passed an order in the case of Ruchi Soya Industries, where connected entities collectively placed huge sell' orders which were significantly higher than the prevailing market price. The order size was revised in the last three minutes of trade on September 27, 2012. This was done to "enable the aforesaid buying entities to establish a higher trading price in the market so as to artificially and forcefully push up the closing/settlement price on the expiry day", said a Sebi statement on the matter.
Yogesh Radke, head of quantitative research at Edelweiss Financial Securities, said a post-close call auction would also allow additional information to be reflected in the stock price. "Such an auction mechanism would provide an additional benefit of fresh price discovery for that post-close session. It would also help factor in any fresh news flow," he said.
CLOSING PRICE MANIPULATION
- Currently, the closing price is determined on the basis of the last half-an-hour weighted average price
- System is open to manipulation through large last-minute orders
- Sebi plans to introduce a call-auction mechanism for closing price
- Orders matched only after a period of price discovery to determine final price
- Move to help curb manipulation, especially in illiquid stocks
- It would also help prices reflect latest news and developments