Trading in single-stock futures on India’s largest bourse sank to a 34-month low as the new closing auction disrupted strategies used by arbitrage funds. Turnover in stock futures on the National Stock Exchange of India fell to about 21 trillion rupees ($219 billion) in September, the lowest since November 2023 and the second straight monthly drop since the auction system was launched on Aug. 3. The impact has been particularly pronounced in stock futures because the auction applies only to individual stocks that have derivatives tied to them. Index futures aren’t subject to the new mechanism and moved in the opposite direction, with turnover rising 14% in September.
"The decline partly reflects fewer opportunities for arbitrage funds after the introduction of the auction system," said Ashish Kyal, founder of Waves Strategy Advisors Pvt. in Mumbai. "Weak market sentiment has also dampened trading activity." Arbitrage funds typically buy shares while selling corresponding futures to profit from price gaps between the two markets, making them major users of single-stock futures. They held a combined 3 trillion rupees ($31 billion) in assets at the end of August. Under the previous system, the closing price was based on the volume-weighted average during the final 30 minutes of regular trading, giving arbitrage desks more time to trade on temporary differences. The auction compresses price discovery into a shorter window, reducing those opportunities and increasing the risk that arbitrage funds are left temporarily unhedged if they can’t execute both sides of a trade.
The Securities and Exchange Board of India is seeking to address those concerns. Bloomberg News previously reported that the regulator gave arbitrage funds more flexibility in managing positions to draw liquidity into the closing auction. Last month, SEBI also proposed changes to the auction and the settlement of expiring derivatives, seeking public feedback through Oct. 3.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing