Market experts are warning traders about heightened volatility within the National Stock Exchange of India's new Closing Auction Session (CAS) for Nifty weekly expiry trading [1, 2].
This instability poses a significant risk to option writers, as low liquidity during the session can trigger sudden and extreme price movements. For traders, these spikes can lead to unexpected losses if positions are held until the final closing moments.
Chandan, a Moneycontrol analyst, said the issue during the Equities Leaders Summit in Miami [1, 2]. He said that the CAS currently suffers from a "chicken-and-egg" liquidity problem, where a lack of participants prevents the price from stabilizing, which in turn discourages more participants from entering the market [1, 2].
This environment creates a precarious landscape for those trading options. Because the auction process aggregates orders before executing them at a single price, a small number of large orders in a thin market can move the closing price drastically [1, 2]. This mechanism can cause an option that appeared safe throughout the day to suddenly expire in the money or deep out of the money due to a momentary spike.
To mitigate these risks, experts suggest a disciplined approach to timing. Traders are advised to exit their positions before 2:45 PM [1] to avoid the volatility associated with the CAS. By closing trades before this window, market participants can lock in their gains or losses without risking the unpredictable price swings that occur during the auction phase [1].
Panelists at the summit said that while the Closing Auction Session is intended to provide a more orderly close to the trading day, the current lack of volume is producing the opposite effect for short-term speculators [1, 2].
“Low liquidity in the CAS creates a "chicken‑and‑egg" situation that leads to sharp price spikes.”
The volatility in the Nifty Closing Auction Session highlights the danger of 'liquidity gaps' in new financial mechanisms. When a trading window lacks sufficient volume, it ceases to be a tool for price discovery and instead becomes a source of systemic risk for option writers, who are particularly vulnerable to sudden price gaps at expiry.
