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Summary: On an afternoon in late August the Sensex appeared to drop 2,200 points in five minutes and then take most of it back. No exchange record contains that fall. Nothing was trading at the time. What the screens were showing instead, and why SEBI has now written a paper about it, is the odd part.
At 3:18 pm on August 27, the cash market in Sensex stocks had been shut for three minutes. Orders were piling into an auction book. Nothing was trading.
Screens still moved. They showed the Sensex down 2,200 points within five minutes, then most of the way back again. A 65,000 Bankex put expiring that day went from about Rs 6 to about Rs 1,000. The Sensex closed at 76,933.59, down 539 points.
That 2,200-point fall is the most quoted number of the past six weeks, and no BSE record contains it. What fell was never an index anybody traded. Yesterday SEBI published a paper that admits as much.
What is a closing auction anyway?
Until August 3, a stock’s closing price was the average of its last 30 minutes of trades, weighted by volume. A few big orders near 3:25 could push that average. Index funds must deal at the close, and that was the price they got.
So SEBI did what New York, Tokyo and Hong Kong do. For F&O stocks, trading now stops at 3:15. Orders collect in a book for ten minutes, within 3 per cent of a reference price. The exchange matches them at the one price that clears the most quantity. That is the close. Derivatives trade till 3:40.
So what went wrong?
The auction itself worked. On August 31, the MSCI review day, index funds put Rs 39,718 crore through NSE’s auction, 22 per cent of the day’s cash turnover. That is what a closing auction is for.
Next door, the options market was still open while cash stood still. On expiry days, SEBI’s numbers show, NSE index option premium ran at Rs 190 crore a minute in the 3:20 to 3:30 window, against Rs 126 crore in the old last half-hour.
Traders were pricing based on the indicative index. Every stock in the auction has an indicative price, the price it would clear at if the auction ended now. String those together, and you get an indicative Sensex. A big order lifts it, a cancellation drops it, and no share changes hands. Options are priced off it as though the index had really moved.
On August 13, SEBI’s interim order alleges that Copthall Mauritius bid for all 30 Sensex stocks at the top of the band, lifted the indicative index, then cancelled most of it. Mansi Share and Stock Broking did the reverse, selling. Alleged gain: about Rs 3.68 crore.
SEBI caught it easily because there were so few trades. NSE’s auction turnover in the first month was about Rs 63,000 crore, and Rs 39,718 crore of it came on MSCI day. Strip that day out, and the auction handled roughly Rs 1,150 crore a day, while cash turnover averaged Rs 1.19 lakh crore. One rupee in a hundred sets the closing price for everybody.
And the ETF thing?
A separate rule, same instinct. SEBI’s circular of June 15, in force from September 7, draws an ETF’s daily price band around the previous day’s traded price instead of a two-day-old NAV. International ETFs cannot create new units, so yesterday’s price already carries a premium and the band follows it up. The Motilal Oswal Nasdaq Q50 ETF went from 19.5 per cent over NAV to 83 per cent in four sessions while its holdings fell, as we reported on September 10. Where little trades, the close stops meaning much.
What does the paper fix?
Settlement first. Either blend the last 30 minutes of trading with the 10-minute auction, weighted by traded value, or revert to the old year-long average and then blend. Either ends the lottery element, because a small auction cannot move a large average far. Blend now. A year on the old method teaches nobody to use the auction.
Then stop broadcasting the indicative index, while keeping stock-level indicative prices. Hong Kong does this.
Then timings. Option A runs trading till 3:30 for every stock, auction till 3:40, F&O till 3:45. Option B keeps 3:15 and finishes by 3:30. Both cut the transition to a minute. Only Option A gives each stock its own closing time again.
And orders placed more than 1 per cent from the reference price could no longer be cancelled, only improved. Post size at the edge and you own it.
So what does this mean for you?
Your fund now values its holdings at a price someone actually traded at. If you do not trade options, very little. If you do, the expiry-day lottery should end once the settlement rule changes. SEBI’s own study of August 20 found 87.7 per cent of individual equity derivatives traders lost money in 2025-26, Rs 91,685 crore between them. The auction made one month of expiries worse. But those losses have older causes.
Also read: How overheated (or cool) is the Indian market?
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