India's index-options activity will continue to be hit by a new closing auction system that has led to sharp equity price moves in the final minutes of trading, creating challenges for brokers, exchanges and fund managers, Bernstein said on Tuesday.
The equity research firm expects the system to settle in the coming months even as the transition weighs on volumes and capital-market stocks in the near term.
The so-called closing auction system, launched on August 3, determines the official closing price of Indian stocks with derivatives contracts. Since these stocks carry substantial weights in the benchmarks, their closing levels sway the Nifty 50 (.NSEI) and Sensex (.BSESN), impacting derivative traders and passive investors.
India is one of the world's largest equity-derivatives markets and the National Stock Exchange was the largest derivatives exchange by the number of contracts in 2025.
"Every investor conversation we have had over the last week has touched upon the CAS and how volumes may get impacted from the same," Bernstein analysts Manas Agrawal and Himank Sangai said in a note on Tuesday.
The new system has thinned market participation in the last 15 minutes, with volumes in that window accounting for 1.6% to 2.3% of daily turnover on the NSE versus the historical share of 10.1%, Bernstein analysis showed.
This has resulted in sharp price swings and reduced visibility on the likely final price, according to Bernstein.
Lower index-options contract volumes could also hurt retail-focused discount brokers, who depend on orders for revenue. Stock exchanges are also exposed as they charge fees on options premium turnover.
Meanwhile, retail traders are seeing an erosion in the value of the options they sell, while buyers have seen sharp gains or losses as indexes swing during the closing auction, according to Bernstein.
The research firm said passive funds have largely avoided the closing window so far but may need to participate on days when indexes are rebalanced.
Thin auction liquidity has also fueled concerns over unexplained swings and possible order "spoofing", as seen in the sharp intra-window moves even when pre-auction-to-close gaps were modest, Bernstein said.
